Weaver v. Ritchie

• Decision Date: 16 October 1996
• Docket Number: No. 23080,23080
• Citation: 478 S.E.2d 363,197 W.Va. 690
• Court: West Virginia Supreme Court
• Parties: R. Joe WEAVER, O.D., and Lana M. Weaver, O.D., Plaintiffs Below, Appellees, v. Douglas F. RITCHIE, O.D., Defendant Below, Appellant.

Page 363

478 S.E.2d 363

197 W.Va. 690

R. Joe WEAVER, O.D., and Lana M. Weaver, O.D., Plaintiffs Below, Appellees, v. Douglas F. RITCHIE, O.D., Defendant Below, Appellant.

No. 23080.

Supreme Court of Appeals of West Virginia.

Submitted Jan. 16, 1996.

Decided Oct. 16, 1996.

Syllabus by the Court

1. To determine if a covenant not to compete ancillary to a sale of a business is reasonable we use a three-part inquiry: A covenant not to compete is reasonable only if it (1) is no greater than is required for the protection of the buyer; (2) does not impose an undue hardship upon the seller, and (3) is not injurious to the public.

2. A less stringent test of reasonableness is applied to a restrictive covenant ancillary to the sale of a business as contrasted with a restrictive covenant ancillary to an employment contract.

3. The burden of producing evidence that a restrictive covenant ancillary to the sale of a business was reasonable is upon the party seeking to enforce the covenant.

Robert L. Bays, Bowles, Rice, McDavid, Graff & Love, Parkersburg, for Appellees.

George J. Consenza, Consenza & Underwood, Parkersburg, for Appellant.

RECHT, Judge: ¹

This matter concerns the validity of a non-competition covenant ancillary to the sale of an optometric practice, known as the Vienna Eye Clinic, by Douglas F. Ritchie, O.D. ² (appellant) to R. Joe Weaver, O.D. and Lana M. Weaver, O.D. (appellees).

After a bench trial of several days, the trial court made findings of fact and conclusions of law holding that the covenant was valid and enforceable and entered a permanent injunction enjoining the appellant from practicing optometry within an area measured by a radius of fifty (50) miles from Vienna, West Virginia, and for a period of fifteen (15) years after the date of the sale. We affirm.

I. THE FACTS

The appellant is an optometrist who, until August, 1989, operated a practice of optometry in Vienna, West Virginia, trading as the Vienna Eye Clinic. The appellees, who also are optometrists, purchased the appellant's optometric practice ³ governed by the terms of an "Agreement of Sale of Optometric Practice and Employment of Principal Agent" (Agreement) executed on August 4, 1989.

The purchase price for the practice was structured as follows:

All personal assets including goodwill and excluding real estate--$165,000;

Assumption of the payment of two outstanding promissory notes--$72,000; ⁴ Payment for covenant not to compete--$175,000. ⁵

The provision which is the centerpiece of this appeal is the covenant of the seller (appellant) to "refrain from the practice of optometry, or in any manner participating in the delivery of eye care services" for a period of fifteen years after August 1, 1989, ⁶ within an area measured by a radius of fifty miles from the city of Vienna, West Virginia. ⁷

All apparently went well for the five years during the post-Agreement employment period. At the conclusion of the five-year employment period, the appellant attempted to renegotiate an additional employment period, only this time demanding an increase in the annual compensation from $60,000 to $72,000 and reducing the number of days devoted to practicing optometry from eighty-six days to eighty days, and finally to convert an at-will employment status to a guaranteed employment term of five years.

The Agreement required the parties to attempt to renegotiate the terms and conditions of an extended employment period. The parties were unable to agree upon the terms of employment beyond the first five-year period. The appellant's reaction to the failure to continued employment upon his demands was to promptly announce to the appellees and the public that he was no longer associated with the Vienna Eye Clinic and would be serving his many patients from a "new state-of-the-art optometric practice" within four blocks of the Vienna Eye Clinic. This announced new location was within fifty miles of Vienna, West Virginia and within the fifteen-year period of restraint.

The appellees sought and obtained an injunction permanently enjoining the appellant from violating the covenant not to compete contained in the Agreement. It is from this order granting the permanent injunction that the appellant appeals, contending that the covenant not to compete as expressed in the Agreement restricting the practice of optometry within a radius of fifty miles of Vienna, West Virginia and for a term of fifteen years after the date of sale is unreasonable and, therefore, unenforceable. ⁸ We disagree, and take this opportunity to refine our jurisprudence on the subject of a covenant not to compete ancillary to the sale of a business or professional practice, compared and contrasted with a covenant not to compete ancillary to an employment agreement. We have discussed the latter arrangements on a number of occasions, ⁹ however we have not had an opportunity to discuss a covenant not to compete ancillary to the sale of a business since 1950 in Axford v. Price, 134 W.Va. 725, 61 S.E.2d 637 (1950). ¹⁰

II. STANDARD OF REVIEW

As is our custom, we begin any appellate analysis by first establishing the appropriate standard of review. The core of this appeal is the appellant's challenge to the trial court's findings of fact and conclusions of law which serve as predicates to the granting of the permanent injunction enforcing the covenant restricting competition for a given period of time in a defined geographical area. In reviewing challenges to the findings and conclusions of the trial court, we apply a two-pronged deferential standard of review with the final order and ultimate disposition (granting of the permanent injunction) reviewed under an abuse of discretion standard, and the underlying factual findings under a clearly erroneous standard. Phillips v. Fox, 193 W.Va. 657, 458 S.E.2d 327 (1995); see also Syllabus Point 1, G Corp. v. MackJo, Inc., 195 W.Va. 752, 466 S.E.2d 820 (1995) (holding that a permanent injunction rests in the sound discretion of the trial court and will not be disturbed on appeal unless there is a clear showing of an abuse of discretion) (quoting Syllabus Point 11 of Stuart v. Lake Washington Realty, 141 W.Va. 627, 92 S.E.2d 891 (1956). In Phillips, we noted that in applying a deferential standard, we review the trial court's findings of fact following a bench trial, including mixed facts/law findings, under the clearly erroneous standard. If the trial court's findings of fact are not clearly erroneous ¹¹ and the correct legal standard is applied, its ultimate ruling will be affirmed as a matter of law. We conclude that the trial court's findings of fact are not clearly erroneous, the trial court applied the correct legal standard to these facts so that the ultimate ruling granting the permanent injunction is affirmed as a matter of law. Phillips, 193 W.Va. at 662, 458 S.E.2d at 332.

III. DISCUSSION

A.

Distinguishing Covenants Not to Compete Ancillary to Sales

As Opposed to Employment Agreements

We begin our discussion with the acknowledgment that covenants not to compete, whether ancillary to a sales or employment agreement, are similar in that they both involve restraints of trade. This similarity allows the application of a common legal standard measuring the validity and enforcement of the covenant. This standard derives from Mitchell v. Reynolds, 1 P. Wms. 181, 24 Eng. Rep. 347 (Q.B.1711), as the "Rule of Reason" which requires weighing all the facts and circumstances of a case to decide whether a restriction unreasonably restrains competition. ¹²

Once we get past the similarity of non-competition covenants ancillary to a sales or employment agreement by looking to the rule of reason to test the validity and enforceability of both covenants, the differences between the type of agreement containing the covenants become apparent. Because the motivation and purpose of the restrictive covenant embraced in a sales agreement are substantially different from a covenant in an employment agreement, the rule of reason is applied with a lesser scrutiny in a sales contract than the covenant ancillary to an employment agreement. See Alexander & Alexander, Inc. v. Danahy, 21 Mass.App.Ct. 488, 488 N.E.2d 22, 28 (1986) ("non-competition covenants arising out of a sale of a business are enforced more liberally than such covenants arising out of an employer-employee relationship" (citations omitted)); Kloville, Inc. v. Kinsler, 239 Ga. 569, 238 S.E.2d 344 (1977) (stating covenants ancillary to sales of businesses are treated less stringently than covenants ancillary to employment contracts); Farmer v. Airco, Inc., 231 Ga. 847, 204 S.E.2d 580 (1974) (stating sale of business covenants are interpreted and enforced with greater leniency than employment contracts); Insurance Center, Inc. v. Hamilton, 218 Ga. 597, 129 S.E.2d 801 (1963) (discussing that in determining a covenant's reasonableness, greater latitude is allowed for sale of business covenants than for employment covenants); Morgan's Home Equipment Corp. v. Martucci, 390 Pa. 618, 136 A.2d 838 (1957) (declaring that covenants not to compete which are ancillary to employment will be subjected to a more stringent test of reasonableness than that which is applied to such restrictive covenants ancillary to the sale of a business), citing Restatement of Contracts § 515(b), cmt. b (1932); Gary P. Kohn, A Fresh Look: Lowering the Mortality Rate of Covenants not to Compete Ancillary to Employment Contracts and the Sale of Business Contracts in Georgia, 31 Emory L.J. 635 (1982).

The reason why a less stringent test of reasonableness is applied to a restrictive covenant ancillary to the sale of a business is found in the conceptual differences of the goals to be achieved by the enforcement of these two types of covenants. A restriction imposed upon the seller of a business affords a person the freedom to sell something that has been acquired by virtue of their labor, skill or talent at the...