Three Phoenix Co. v. Pace Industries, Inc., 1

• Decision Date: 10 March 1981
• Docket Number: No. 1,CA-CIV,1
• Citation: 135 Ariz. 126,659 P.2d 1271
• Parties: , 1981-1 Trade Cases P 63,911, 1982-1 Trade Cases P 64,530 THREE PHOENIX COMPANY, Plaintiff-Appellant, v. PACE INDUSTRIES, INC., Defendant-Appellee. 4773.
• Court: Arizona Court of Appeals

Page 1271

659 P.2d 1271

135 Ariz. 126, 1981-1 Trade Cases P 63,911,

1982-1 Trade Cases P 64,530

THREE PHOENIX COMPANY, Plaintiff-Appellant, v. PACE INDUSTRIES, INC., Defendant-Appellee.

No. 1 CA-CIV 4773.

Court of Appeals of Arizona Division 1, Department A.

March 10, 1981.

On Motion for Rehearing Nov. 19, 1981.

Review Granted Dec. 22, 1981.

Kenneth A. Winsberg, P.C. by Kenneth A. Winsberg, Cruse, Meadow & Firetag by Stephen T. Meadow, Phoenix, William W. Webb and Jonathan Rose, Tempe, for plaintiff-appellant

Law Offices of Kenneth R. Reed, P.C. by Kenneth R. Reed, Brian K. Stanley, Phoenix, for defendant-appellee.

Robert K. Corbin, Atty. Gen. by Alison B. Swan, Chief Counsel, Antitrust Div., Phoenix, for State of Ariz., amicus curiae.

OPINION

YALE McFATE, Judge (Retired).

The appellant, Three Phoenix Company, brought this litigation seeking injunctive and other relief based upon an alleged breach of covenants not to compete by the appellee, Pace Industries, Inc. Appellee moved to dismiss on the grounds that the covenants in question were unenforceable. The trial court, taking cognizance of affidavits submitted by appellant, considered the motion as one for summary judgment and granted judgment to appellee.

Since the trial court treated appellee's motion to dismiss as a motion for summary judgment, we must view the record in the light most favorable to appellant, and regard all uncontroverted facts set forth in support of or in opposition to the motion as true. Watts v. Hogan, 111 Ariz. 536, 534 P.2d 741 (1975).

Each of the parties acquired part of the business formerly conducted by the Equipment Division of Wabash Computer Corporation. Wabash Computer decided to get out of the computer testing equipment business in 1973. Appellant acquired the line of business selling and leasing equipment designed to test single magnetic computer memory discs. Appellee acquired the line of business utilizing the "Pack Scan III" system, designed to test a pack or set of multiple discs. Both kinds of equipment were designed to be able to test and certify memory discs at different stages of production.

Wabash had been in the business for several years and had contractual obligations with its existing customers to be fulfilled in the future. Donald Oglesby, president of appellant, was formerly general manager of the Wabash Equipment Division. Edward McDonald, president of appellee, was formerly employed as a manager in the engineering group in the Equipment Division. McDonald expressed an interest in acquiring all of the testing equipment business. Wabash was not confident, however, that McDonald could fulfill the existing contractual obligations. Eventually, however, it was agreed that a corporation (appellee) to be formed by McDonald would acquire the Pack Scan III line, and a corporation formed by Oglesby (appellant) would acquire the single disc testing line. Oglesby's sworn statement of facts, presented in support of appellant's opposition to the motion to dismiss in the trial court contains the following:

The Plaintiff's willingness to accept Wabash's obligations to its existing customers depended on its having a viable single disc tester business to the extent that Wabash could provide it. What Wabash could do in that regard was to assure that in consideration of McDonald's taking the Pack Scan III, he would not compete with the Plaintiff with respect to any other part of Wabash's Equipment business, which was being transferred to the Plaintiff. This was part of the price paid by the Defendant for the Pack Scan III. Indeed, the obligations of Pace to refrain from such competition was limited on the period during which it continued to use the Pack Scan III technology in its business.

The Wabash-Three Phoenix (appellant) agreement was negotiated by Oglesby for Three Phoenix and William F. Boyd, Chairman of Wabash Magnetics ¹, for Wabash. The Wabash-Pace (appellee) agreement was negotiated by Edward McDonald for Pace and by Oglesby and George E. Dashiell, then president of Wabash, for Wabash. The two arrangements were at all times considered a part of one plan for the disposition of the Wabash Equipment Division. It was known to McDonald that the interests of Three Phoenix were given great weight in formulation of the Wabash-Pace agreement, to the extent that Oglesby held virtual veto power over the Wabash-Pace agreement.

For as long as it was in the test equipment business, Wabash sold to a world-wide market. Wabash had fewer than fifteen customers world-wide for single disc testers in 1973. It is Oglesby's business judgment, and was at the time in question, that there cannot be a viable disc tester business which covers less than a world-wide market, due to the small volume of sales for such equipment.

It was the appellant's intention as well as the intention of the other parties to the above-described agreements that Pace be restricted from engaging in competition with the products then contemplated by Wabash and Three Phoenix for the testing of single discs for as long as Pace was using the Wabash technology purchased by it in its own business. It was not known how long such discs would last in the market, which time period would determine the length of viability of the market for single disc testers. It was, however, considered fair and reasonable to limit the restriction on Pace to the time during which it enjoyed the benefits of the technology transferred to it by Wabash. Also, it was then considered that the application of the technology purchased by Pace to single disc testing would give Pace an extra advantage over other competitors in the single disc tester market. The possibility of such a result was precluded in the agreements because Three Phoenix purchased Wabash's entire single disc testing business.

Although the Wabash-Three Phoenix and the Wabash-Pace agreements seem on their face to have been made several months apart, they were in fact concurrently negotiated as part of an overall plan. The essence of the transaction between Wabash and Three Phoenix was known to McDonald when that agreement was made; that is, he knew that Wabash intended to and did transfer its entire equipment business to Three Phoenix excepting only that portion transferred to Pace. McDonald also knew that the ultimate decision as to whether to transfer anything to Pace was Oglesby's, and further, that the Pack Scan III technology would not be transferred without an agreement not to compete with respect to single disc testers.

The agreement between Wabash and Three Phoenix was consummated on June 6, 1973. In it, Wabash agreed to assign to Three Phoenix "rights under certain covenants not to compete", and the parties contemplated that the instrument would be effective to convey any existing covenant. The Wabash-Pace agreement was executed on October 11, 1973. It contains the following paragraphs nine and ten which are critical to this litigation:

9. Non-Competition. BUYER shall not during the term of this agreement within the world manufacture, use, lease, sell or otherwise dispose of any equipment or inventions which would directly or indirectly perform the same operations as said INVENTIONS or be in competition therewith nor shall BUYER for a period of two (2) years or for so long as they manufacture or sell said INVENTIONS, whichever period is longer, design, manufacture or sell any other equipment or products which were heretofore designed, manufactured or sold by the SELLER INCLUDING THE # SSA AND # SDT FOR THE WINCHESTER DISC which SELLER intended to design, manufacture or sell.

10. Non-Competition with Three Phoenix Company. SELLER has sold the following product lines to Three Phoenix Company, an Arizona corporation: the certification equipment, disc memo and TCT-300. BUYER shall not in any way compete with Three Phoenix in said product lines and shall not engage in any business activity with respect to them, including without limitation consulting services, maintenance or the supplying of spare parts.

Appellant's complaint alleged on information and belief that appellee was now competing with it in the market for single disc testers. Appellant sought to enjoin the competition on the basis of paragraphs nine and ten of the Wabash-Pace agreement and its own agreement of acquisition from Wabash.

The trial court held that the Wabash-Three Phoenix agreement of June 6, 1973 was ineffective to convey to Three Phoenix the right to enforce paragraph nine of the agreement entered into between Wabash and Pace Industries on October 11, 1973. The trial court also held that paragraph ten was illegal and unenforceable.

Appellee advanced three major contentions in the trial court:

(1) The Wabash-Three Phoenix agreement (entered into on June 6, 1973) could not effectively assign the covenant not to compete incorporated in the subsequent (October 10, 1973) Wabash-Pace agreement, and, since appellant failed to allege a previous oral covenant, appellant had no standing to enforce paragraph 9.

(2) The covenants and scheme of market division shown by the agreements and appellant's statement of facts constitute a per se violation of the federal and state antitrust laws, 15 U.S.C.A. § 1 and A.R.S. § 44-1402, inasmuch as they purport to accomplish a horizontal division of the computer disc testing market between Pace and Three Phoenix.

(3) Paragraph 10 of the Wabash-Pace agreement is unenforceable because the covenants therein are not reasonably limited--they are world-wide in scope and actually or potentially unlimited in regard to time.

We may dispose of the first issue briefly. Appellant is plainly a third party beneficiary with respect to paragraph 10 of the Wabash-Pace agreement and entitled to seek enforcement of the provision in that capacity. Appellee does not argue to the contrary. In regard to paragraph 9, Section 153 of the most recent tentative draft of the Restatement of Contracts states:

§ 153. Assignment...