Unishops, Inc. v. May's Family Centers, Inc.

• Decision Date: 23 January 1980
• Docket Number: No. 3-478A89,3-478A89
• Citation: 399 N.E.2d 760
• Parties: UNISHOPS, INC., a Foreign Corporation, Unishops M & B of Indiana, Inc., an Indiana Corporation, Tradeway of Highland, Inc., an Indiana Corporation, Central Textile of Indiana, Inc., an Indiana Corporation, Central Textile, Inc., a New Jersey Corporation, Herbert I. Wexler, John Kuehn, Bernard Major and Walter Craig, Individually, Appellants-Defendants, v. MAY'S FAMILY CENTERS, INC., an Indiana Corporation, Appellee-Plaintiff.
• Court: Indiana Appellate Court

Page 760

399 N.E.2d 760

UNISHOPS, INC., a Foreign Corporation, Unishops M & B of Indiana, Inc., an Indiana Corporation, Tradeway of Highland Inc., an Indiana Corporation, Central Textile of Indiana Inc., an Indiana Corporation, Central Textile, Inc., a New Jersey Corporation, Herbert I. Wexler, John Kuehn, Bernard Major and Walter Craig, Individually, Appellants-Defendants, v. MAY'S FAMILY CENTERS, INC., an Indiana Corporation Appellee-Plaintiff.

No. 3-478A89.

Court of Appeals of Indiana, Third District.

Jan. 23, 1980.

Max Cohen, David Capp, Cohen & Thiros, Merrillville, for Unishops, Inc., Unishops M & B of Indiana, Inc., Central Textile of Indiana, Inc., Central Textile, Inc., Herbert I. Wexler and John Kuehn.

Robert Peters, Lucas, Clifford & Holcomb, Merrillville, for Tradeway of Highland, Inc., Bernard Major and Walter Craig.

Arnold Krevitz, Merrillville, Bernard Wiczer, Chicago, Ill., for appellee-plaintiff.

STATON, Judge.

May's Family Centers, Inc. (May's) filed an action against Unishops, Inc., some of its corporate officers and three of its wholly owned subsidiaries (Unishops) seeking to enjoin them from entering into several license agreements with Tradeway, a competing retail store. May's claimed that Unishops, its licensee, was in violation of a restrictive covenant in their contract which licensed Unishops as the operator of certain departments in the May's stores. The court entered a judgment granting May's an injunction against Unishops on December 8, 1977 and then entered an Amended Judgment for Injunction on December 27, 1977. At that time, it reiterated the terms of the original judgment and, additionally, ordered Unishops to remove all of their men's and boy's and domestics merchandise from the competing Tradeway store within 45 days.

On appeal, Unishops raises five issues for our review:

(1) Was there sufficient evidence to support the enforcement of this restrictive covenant?

(2) Was there sufficient evidence to support the trial court's finding that May's lacked an adequate legal remedy and that it would suffer irreparable harm without injunctive relief?

(3) Was May's refusal to consent to Unishops' proposed licensing agreement with a competitor unreasonable in light of their contract?

(4) Did the trial court err when it failed to apply the equitable doctrine of "unclean hands?"

(5) Was the relief granted by the trial court beyond the scope of the pleadings and the evidence adduced at trial?

We affirm.

The facts relevant to our disposition of the case indicate that Unishops, a national corporation, contracted with May's owner and operator of six retail stores in Indiana to operate certain departments in the May's stores. The two license agreements, which are in issue, have practically identical terms. One of the licenses grants Unishops the right to operate the men's and boy's divisions in all of the May's stores. The other grants them the right to operate its domestics division. Both license agreements contain a restrictive covenant which prohibits Unishops from engaging in a similar business within a five-mile radius of any of the May's stores. The covenant provides:

"3. Without Licensor's prior written consent, which consent shall not unreasonably be withheld, Licensee agrees that during the life of this License Agreement it will not engage either directly or indirectly within a radius of five (5) miles of any of Licensor's Stores, in a business similar to or the operation of a department similar to that conducted by the Licensee in such Store. A violation of this provision shall permit the Licensor to cancel this License Agreement with respect to all stores, upon sixty (60) days prior written notice to the Licensee, provided Licensee does not correct such violation within said sixty (60) day period."

In the fall of 1977, Unishops entered into three license agreements with Tradeway whereby they would operate the men's and boy's, domestics and shoe departments in a new Tradeway store. This store was located in the middle of the May's trading area, 4.42 miles from one May's store and 4.43 miles from another. Before Unishops had signed the contract with Tradeway or even requested May's consent to do so, they were informed that May's consent to such a venture would not be forthcoming. On November 9, 1977, May's filed an action seeking to enjoin Unishops from implementing the license agreements with Tradeway in violation of their restrictive covenant. The injunction was granted and is the subject of this appeal.

I. Reasonableness

Unishops contend that there is insufficient evidence to support the enforcement of the restrictive covenant. A lessor's extraction, from a lessee, of a covenant not to engage in certain commercial activities in which the lessor is already engaged, is permissible. It, however, creates a limited geographic monopoly and, as such, is a restraint of trade. Howard D. Johnson Co. v. Parkside Develop. Corp. (1976), Ind.App., 348 N.E.2d 656. Nonetheless, such a covenant will be enforced and injunctive relief will be extended to prevent the breach if the restraint is reasonable with respect to the parties involved and the public interest. ¹ Welcome Wagon v. Haschert (1955), 125 Ind.App. 503, 127 N.E.2d 103; Grand Union Tea Company v. Walker (1935), 208 Ind. 245, 195 N.E. 277. This question of reasonableness is one of law for the court, rather than for the jury, and it is to be determined by looking at all the facts and circumstances surrounding each case. Frederick v. Professional Bldg. Main. Indus. Inc. (1976), Ind.App., 344 N.E.2d 299.

Our Supreme Court in Donahue v. Permacel Tape Corp. (1955), 234 Ind. 398, 127 N.E.2d 235 sets out a three-pronged test for the determination of the reasonableness of a restrictive covenant. In following its guidelines, we will look to: (a) the question of whether the promise is broader than necessary for the protection of the covenantee (May's) in some legitimate interest, (b) the effect of the promise upon the covenantor (Unishops), and (c) the effect upon the public interest.

After examining whether this covenant was necessary for May's protection in the pursuit of some legitimate interest, we must answer affirmatively. In addition to violating the five-mile radius contract term, Unishops' arrangement with Tradeway put them in the position of being privy to May's "inside" operation, while working in a competitor's store. One of the May's officers testified of his fear that Unishops might potentially disclose May's confidential information to Tradeway. Because Unishops were working within the May's stores, they were in a position to observe and then possibly disclose May's advertising programs, "loss leaders," marketing policies, purchasing and pricing strategies, security systems, customer lists or departmental sales volumes to Tradeway. In fact, the evidence at trial showed a striking similarity between May's advertising, which had been prepared six months in advance, and the initial advertising of the opening Tradeway store. We conclude that the restrictive covenant was reasonably drawn to protect the covenantee in the operation of its business.

Next, we must look to the effect of the promise upon the covenantor (Unishops). Unishops promised not to operate, within a five-mile radius of any May's stores, a department similar to those which they operated for May's. They did not promise that they would never operate any men's and boy's or domestics departments in competition with May's or even that they would not operate any similar departments concurrently with their May's operations. They merely promised not to manage any competing departments in a store located within a five-mile radius of a May's store. This situation is somewhat analogous to one in which an employee has signed a contract, which includes a restrictive covenant not to compete with his employer. The Court in Donahue, supra, at 241 summarized the applicability of a restrictive covenant in this situation quite aptly in quoting from Roy v. Bolduc (1943), 140 Me. 103, 34 A.2d 479, 480:

" ' * * * (W)hile an employer, under a proper restrictive agreement, can prevent a former employee from using his trade or business secrets, and other confidential knowledge gained in the course of the employment, and from enticing away old customers, he has no right to unnecessarily interfere with the employee's following any trade or calling for which he is fitted and from which he may earn his livelihood and he cannot preclude him from exercising the skill and general knowledge he has acquired or increased through experience or even instructions while in the employment. Public policy prohibits such undue restrictions upon an employee's liberty of action in his trade or calling. * * * ' "

Like our hypothetical employee, Unishops were not precluded from "exercising the skill and general knowledge" they had acquired. They were neither asked to give up their license agreements with other stores in the area nor were they precluded from doing business with May's. They were only to refrain from operating any similar departments in the Tradeway store located within a five-mile radius of the two May's stores. We conclude that this was not unreasonable.

We must finally view the effect of this covenant upon the public interest. It is true that public policy will prohibit the enforcement of a covenant which places undue restrictions upon a covenantee's liberty of action in his business or trade. Donahue, supra. But such is not the case here. The public interest is not harmed by the enforcement of this covenant.

II. Injury

Unishops next complaint that there was insufficient evidence to support the trial court's finding that May's lacked an adequate legal remedy and that it would suffer irreparable harm without injunctive relief. We disagree. In viewing the reasonableness of a restrictive covenant, we will look to all the facts and circumstances surrounding each case. Fr...