System Concepts, Inc. v. Dixon, 18034

• Decision Date: 08 August 1983
• Docket Number: No. 18034,18034
• Citation: 669 P.2d 421
• Parties: SYSTEM CONCEPTS, INC., a Utah corporation, Plaintiff and Appellant, v. Shirley M. DIXON, an individual, Defendant and Respondent.
• Court: Utah Supreme Court

Page 421

669 P.2d 421

SYSTEM CONCEPTS, INC., a Utah corporation, Plaintiff and Appellant, v. Shirley M. DIXON, an individual, Defendant and Respondent.

No. 18034.

Supreme Court of Utah.

Aug. 8, 1983.

John Parsons, Thomas N. Crowther, Cynthia J. Crass, Salt Lake City, for plaintiff and appellant.

Ellen Maycock, Salt Lake City, for defendant and respondent.

HALL, Chief Justice:

This interlocutory appeal arises out of an action by System Concepts, Inc. (hereinafter SCI), against the defendant Shirley M. Dixon for an injunction and for damages resulting from an alleged breach of a covenant not to compete contained in a contract of employment. SCI appeals the trial court's denial of its motion for preliminary and permanent injunctive relief, claiming that the employment contract in this action was enforceable by equitable injunctive relief, that SCI has met its burden under the governing rule, ¹ and that the trial court's findings of fact, conclusions of law and order are not supported by the record.

On or about May 15, 1978, defendant commenced employment with SCI, a company engaged in the manufacture and sale of sophisticated cable television equipment. Although no written employment agreement was executed at that time, defendant was given a job title of "sales coordinator" and was assigned the duties of compiling customer lists, assisting in advertising, coordinating sales and leads and answering telephones.

In November of 1978, SCI employees were asked to sign an agreement, in connection with their employment, entitled "Proprietary Information Agreement." According to SCI officials, the purpose of this agreement was to protect the company's goodwill and to prevent competitors from acquiring, appropriating or discovering the distinctive characteristics and design features of the company's products and to maintain and protect the competitive advantage of its products in the industry. Among the restrictive provisions of this agreement was an anticompetition covenant which prohibited employees from rendering certain types of services to competitors (defined in the agreement as "Conflicting Organizations") within two years from the date of termination of their employment with SCI. The agreement further provided that in the event of a breach by the employee, SCI's rights under the agreement would be enforceable by injunction. Defendant signed this agreement on January 11, 1979 (some two months after receiving it), in consideration of her continued employment with SCI.

During the month of December (1978), prior to her execution of the agreement, defendant was promoted to national sales manager and given a substantial raise. Over the course of her employment and in her capacity as national sales manager, defendant became knowledgeable and familiar with SCI's products, sales methods and customers. She was also involved, somewhat, in the operational design specifications and technical development of a number of SCI's products, and had access to proprietary information. Her name, picture and role as national sales manager were promoted extensively in various advertising media, in conjunction with the company's products.

In March of 1981, defendant voluntarily terminated her employment with SCI. Shortly thereafter, notwithstanding the terms of the agreement, she accepted employment with MetroData, a competitor of SCI in the production of cable television equipment. Defendant's job title with MetroData was and is national sales manager, just as it was with SCI. Inasmuch as the field of prospective clientele for cable television equipment, such as is manufactured and marketed by SCI and MetroData, is somewhat limited due to the infancy of the industry, defendant must contact the same customers as a representative of MetroData as she did as an agent for SCI. ²

SCI commenced this action against both defendant and MetroData in July of 1981, in an effort to have their employment relationship enjoined and to recover such damages as had been and would be incurred as a result of defendant's breach of the agreement and MetroData's interference therewith. As to MetroData, the action was dismissed upon motion for lack of jurisdiction, and no appeal was taken.

Prior to effecting service of process, SCI obtained two consecutive temporary restraining orders against defendant's employment with MetroData. Following service of process, SCI moved the court for a preliminary injunction. A hearing was then held upon the motion, which resulted in a denial of relief. Thereupon, SCI brought this interlocutory appeal.

The fundamental issue on appeal is the propriety of injunctive relief under the above-stated circumstances. Injunction, being an extraordinary remedy, should not be lightly granted, ³ and it is well settled that:

The granting or refusing of injunction rests to some extent within the sound discretion of the trial court, and its judgment ... will not be disturbed on appeal unless it can be said the court abused its discretion, or that the judgment rendered is clearly against the weight of the evidence. ⁴

Furthermore, the discretion of the court should be exercised within the purview of sound equitable principles, taking into account all the facts and circumstances of the case. ⁵

The specific grounds upon which an injunction may be granted are set forth in Rule 65A(e) of the Utah Rules of Civil Procedure, which reads as follows:

An injunction may be granted:

(1) When it appears by the pleadings on file that a party is entitled to the relief demanded, and such relief, or any part thereof, consists in restraining the commission or continuance of some act complained of, either for a limited period or perpetually;

(2) When it appears from the pleadings or by affidavit that the commission or continuance of some act during the litigation would produce great or irreparable injury to the party seeking injunctive relief;

(3) When it appears during the litigation that either party is doing or threatens, or is about to do, or is procuring or suffering to be done, some act in violation of the rights of another party respecting the subject matter of the action, and tending to render the judgment ineffectual;

(4) In all other cases where an injunction would be proper in equity.

Accordingly, in order to secure injunctive relief, the moving party must show sufficient of the foregoing grounds to convince the trial court to exercise its discretion in favor of issuing the injunction.

SCI contends that the trial court's denial of injunctive relief was an abuse of discretion and clearly against the weight of the evidence. This contention rests upon SCI's allegation that the evidence adduced at the hearing below clearly established each of the three specific grounds for injunction listed in Rule 65A(e), supra.

With respect to the first ground for injunctive relief (apparent entitlement to relief demanded), SCI maintains that it is not necessary to show entitlement to an absolute certainty; rather, it is enough to show probable entitlement. ⁶ SCI further maintains that it has shown probable entitlement to the requested relief by proving the validity and enforceability of the subject restrictive employment covenant.

To be valid and enforceable, a restrictive employment covenant must comply with the requirements set forth in Allen v. Rose Park Pharmacy. ⁷ These requirements are that: (1) the covenant be supported by consideration (2) no bad faith be shown in the negotiation of the contract; (3) the covenant be necessary to protect the goodwill of the business; and (4) it be reasonable in its restrictions as to time and area. ⁸ SCI asserts that the covenant at issue meets all of these requirements. We agree.

The question of the adequacy of consideration for the subject covenant was resolved at the hearing below. The record reveals that the trial court specifically found SCI's offer of continued employment to be adequate consideration for the defendant's submission to the terms of the covenant.

There was neither evidence nor allegation of any bad faith in the negotiation of the Proprietary Information Agreement. Furthermore, it was defendant's voluntary termination which brought her employment relationship with SCI to a close some three years after it began.

In Rose Park, the plaintiff, a pharmacist, became employed by defendant and sometime thereafter executed a restrictive employment contract similar to that at issue in the present case. Upon termination of the employment relationship, plaintiff sought, by declaratory judgment, a determination of the validity and enforceability of the restrictive covenant. The Court held:

If there is legal consideration given to support it, an employer is equally entitled to the good will created by his employee, as is the purchaser of an establishment which includes the good will of the business. In both cases, when the individual responsible for creating the good will and the business to which it attaches, become separated, it is necessary to preserve that good will to the business by a covenant on the part of the individual that he will not compete in an area where his personal reputation will detach the old customers from the old business. We hold that a covenant is valid which protects good will as well as trade secrets.

....

... Therefore, we hold that a covenant not to compete is necessary for the protection of the good will of the business when it is shown that although the employee learns no trade secrets, he may likely draw away customers from his former employer, if he were permitted to compete nearby. ⁹

In the present case, SCI developed its goodwill, to a substantial degree, through the defendant in her capacity as national sales manager. Under the Rose Park reasoning, this goodwill alone would be considered a protectible interest which SCI could justifiably secure through a restrictive covenant. More recently, however, this Court has held that to justify enforcement of a...