USA-Chem, Inc. v. Goldstein
| Decision Date | 14 February 1975 |
| Docket Number | No. 187,D,187 |
| Citation | 512 F.2d 163 |
| Parties | USAchem, Inc., Plaintiff-Appellant, v. Howard A. GOLDSTEIN and Howard A. Goldstein d/b/a Goldseal Associates, Defendant-Appellee. ockets 74-1201, 74-1223. |
| Court | U.S. Court of Appeals — Second Circuit |
Douglas S. Gates, Rochester, N. Y. (Harris, Beach & Wilcox, Rochester, N. Y., Henry W. Williams, Jr., Rochester, N. Y., of counsel), for plaintiff-appellant.
Warren Rosenbaum, Rochester, N. Y. (Shapiro & Rosenbaum, Rochester, N. Y., on the brief), for defendant-appellee.
Before MEDINA, MANSFIELD and MULLIGAN, Circuit Judges.
Unfortunately for the parties and the federal courts, Howard A. Goldstein and National Chemsearch Corp. of New York entered into a contract on April 19, 1963, whereby Goldstein became employed as a salesman of what the company somewhat elegantly describes as "chemical specialities" and what Goldstein more realistically refers to as janitorial supplies." Chemsearch was thereafter totally acquired by U.S.Achem (Chem), a nationwide distributor of soaps, detergents, disinfectants, insecticides and comparable building maintenance and sanitary supplies. The business is highly competitive, with Chem employing about 1,000 salesmen throughout the United States and controlling about 1% or less of the national market. The "Sales Representative's Agreement" entered into by Goldstein assigned as his territory three upstate New York counties (Steuben, Yates and Ontario), plus seven municipalities in a fourth county (Monroe). A fifth county (Genesee) was added by letter amendment on December 26, 1963. The company reserved the right to do business in the assigned territory under various trade-names and to employ other representatives therein. The agreement further provided that during his term of employment and for 18 months after its termination for any reason, Goldstein would not himself or with others sell comparable products in the area or solicit or divert the company's customers in the assigned territory. The contract further provided that
the term of each such covenant so violated shall be automatically extended for a period of eighteen (18) months from the date on which Representative permanently ceases such violation or for a period of eighteen (18) months from the date of the entry by a court of competent jurisdiction of a final order or judgment enforcing such covenant(s), whichever period is later.
The agreement was terminable by either party without notice. Goldstein was to be paid commissions in accordance with a Commission Schedule, and advances against commissions earned and to be earned would be made by the company in such amounts as the company determined. The agreement further provided that it "shall be construed under and governed by the laws of the State of Texas." Both Chem and its predecessor were Texas corporations. The agreement was signed in New York and the work was to be performed in New York.
Goldstein, after a short training period, 1 proceeded to vend janitorial supplies in upper New York State to the apparent satisfaction of Chem until Friday, August 25, 1972 when he advised the company that he was quitting. On or about August 1, 1972, he had filed a certificate of doing business under the name "Gold Seal Associates," which, on Tuesday, August 29, 1972, made its first three sales of comparable chemical supplies to former Chem customers in the assigned territory.
Not until December 11, 1972 did Chem take action against Goldstein by commencing a diversity suit in the United States District Court for the Western District of New York. In the first cause of action Chem alleged breach of the restrictive covenant causing irreparable damage to its business and good will, and unfair competition. In a second cause of action Chem sought to recover advances in excess of earned commissions. Chem also sought a preliminary injunction and a final injunction prohibiting the defendant from competing with Chem for an 18-month period from the date of a final order of the court, plus an accounting, compensatory damages including the advances with interest, punitive damages in the sum of $25,000, and the costs of the suit.
The defendant's amended answer filed on February 15, 1973 pleaded particular and general denials as well as affirmative defenses, including the illegality of the restrictive agreement, breach by Chem of the contract, interference by Chem with Goldstein by operating competing businesses in the assigned area, and finally the invalidity of the contract because of unconscionability. The defendant also counterclaimed, alleging that Chem had converted funds owed to Goldstein by reason of his participation in profit-sharing and stock participation plans. 2
On February 22, 1973, Chem moved the district court for a preliminary injunction restraining Goldstein from competing, soliciting orders or divulging confidential information. Goldstein made a cross-motion, by notice of motion dated March 5, 1973, to dismiss the complaint because of failure to establish the $10,000 jurisdictional amount required by 28 U.S.C. § 1332(a). Both motions were argued on March 12, 1973 before the Hon. Harold P. Burke, United States District Judge, who denied both motions on July 31, 1973. In his findings Judge Burke stated that the plaintiff had failed to show the irreparable damage necessary for a preliminary injunction and concluded that damages and an injunction after trial would constitute adequate protection. The defendant's motion to dismiss was denied without any comment. Plaintiff did not bother to appeal and the case proceeded to trial on the merits before a jury on December 11 and 12, 1973.
After both sides had rested, Judge Burke made the following rulings as a matter of law from the bench:
1) Denied the renewed motion of the defendant to dismiss because of failure to establish the jurisdictional amount;
2) Dismissed the claim of plaintiff for punitive damages;
3) Granted the plaintiff's claim for a recovery of unearned advances. (Judgment for $3,336 with interest at 6% was entered on January 11, 1974);
4) Granted the plaintiff's motion to dismiss the defendant's counterclaim;
5) Charged the jury that as a matter of law the contract was valid and that the provisions relating to post-employment competition were valid both as to time and territorial restrictions and that Goldstein was violating them.
Judge Burke submitted two written questions to the jury to be answered in writing. The questions were as follows:
(1) Has the plaintiff sustained damages by loss of profits by reason of sales made by the defendant within his former contact assigned territory?
(2) If your answer to Question 1 is yes, how much in dollar damages has the plaintiff sustained by loss of profits by reason of sales made by the defendant within his former contract assigned territory, between the dates August 29, 1972, and November 27, 1973?
Plaintiff's counsel stated that he took no exceptions to the charge and had no requests for any additional charge.
The jury returned the written finding that Chem had suffered no damages. In his findings and judgment of January 10, 1974, Judge Burke stated: "Based upon that finding by the jury, I find that there is no reasonable probability that the plaintiff will sustain damages during a period of eighteen months following the entry of this judgment." He further found that there was "no reasonable probability that the defendant will in the future divulge to others or use for his own benefit any confidential information acquired during the course of his employment relating to sales, processes, or formulas." He therefore denied plaintiff's application for an injunction in all respects.
Chem appeals from the judgment below as well as the denial of its motion for preliminary injunctive relief, and Goldstein cross-appeals from the dismissal of the counterclaim, the denial of his motion to dismiss the complaint for want of the jurisdictional amount, and the granting of judgment against him for $3,336 in advances paid to him by Chem.
The substantial and core issue presented to this court is the validity of the restrictive covenant in the sales representation agreement. A threshold question is whether the contract is governed by the law of New York or Texas. Chem is no stranger to the federal courts and the precise contract and the choice of law provision it contains have been before other tribunals. 3 We need not reach the question since we find no significant difference between the two jurisdictions in their approach to the question of employee restrictions. Reasonable limitations of time and space upon the right to compete are to the sole criteria to be examined. Thus, in Grace v. Orkin Exterminating Co., 255 S.W.2d 279, 284 (Tex.Civ.App.1953), the court stated:
Covenants in favor of the former employer, restricting competition by a former employee after the employment has terminated, which lasted for a reasonable time and which operated over a reasonable area, have been specifically enforced by injunction in cases where the goodwill of the employer's customers had attached to the employee during the latter's employment and the employee thus had acquired during his employment a special influence with the customer which gave him an advantage over the employer in competition for the customer's business.
(Emphasis added).
In Purchasing Associates, Inc. v. Weitz, 13 N.Y.2d 267, 272, 246 N.Y.S.2d 600, 604, 196 N.E.2d 245, 248 (1963), the New York Court of Appeals stated that a covenant barring an employee form competing with his former employer is
not only subject to the overriding limitation of "reasonableness" but is enforced only to the extent necessary to prevent the employee's use or disclosure of his former employer's trade secrets, processes or formulae (citing cases) or his solicitation of, or disclosure of any information concerning, the other's...
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