Welcome Wagon Intern., Inc. v. Pender, 599

• Citation: 255 N.C. 244,120 S.E.2d 739
• Decision Date: 07 July 1961
• Docket Number: No. 599,599
• Court: United States State Supreme Court of North Carolina
• Parties: WELCOME WAGON INTERNATIONAL, INC. v. Evelyn L. PENDER.

Page 739

120 S.E.2d 739

255 N.C. 244

WELCOME WAGON INTERNATIONAL, INC. v. Evelyn L. PENDER.

No. 599.

Supreme Court of North Carolina.

July 7, 1961.

Egbert L. Haywood, Emery B. Denny, Jr., of Haywood & Denny, Chapel Hill, for plaintiff, appellant, Walter P. Armstrong, Jr., Memphis, Tenn., of counsel.

Tally, Tally, Taylor & Strickland, by Nelson W. Taylor and Jesse M. Henley, Jr., Fayetteville, for defendant, appellee.

HIGGINS, Justice.

In passing on the demurrer this Court must accept as true the facts alleged. Hence, for purposes of the present hearing these facts are deemed established: (1) The parties entered into a written contract. (2) The mutual covenants furnished valuable consideration for it. (3) The defendant observed the terms of the contract for more than eight years during which the plaintiff received more than $55,000. (Whether this amount is the total, or the share of each party, is not clear.) (4) The defendant resigned effective September 22, 1958. (5) Immediately thereafter, all of plaintiff's customers cancelled their contracts. (6) The defendant immediately continued her operation as before except for herself rather than for the plaintiff. (7) The defendant is now using the same methods and continuing the same operation in violation of the restrictive covenant in her contract.

The defendant admits the violation. She says, by way of her only defense, the contract is void because it is unreasonable as to time and territory. Our general rule is that the Court will enforce such a contract only if it is reasonable both as to the territory and the time limitations. In determining these questions the Court must take the contract as the parties made it. Henley Paper Co. v. McAllister, 253 N.C. 529, 117 S.E.2d 431; Noe v. McDevitt, 228 N.C. 242, 45 S.E.2d 121.

The court is without power to vary or reform the contract by reducing either the territory or the time covered by the restrictions. However, where, as here, the parties have made divisions of the territory, a court of equity will take notice of the divisions the parties themselves have made, and enforce the restrictions in the territorial divisions deemed reasonable and refuse to enforce them in the divisions deemed unreasonable. It is patent that division (1)--Fayetteville--is not unreasonable. Likewise it appears that divisions (3) and (4)--any city or town in the United States in which the plaintiff is doing, or intends to do business--are unreasonable and will not be enforced. Whether (2) is reasonable is for the chancellor. 'Where the territory embraced in restrictive covenants is unreasonable, but is expressed in divisible terms, i. e., in terms of local geographical or governmental units, the majority of the courts enforce the covenant in as many of the units as are reasonable and disregard the remainder.' 26 N.C.L.R. (1947-48) p. 403, citing 5 Williston on Contracts, 1659 (Revised Ed. 1937-47 Cumulative Supplement); Roane v. Tweed, Del. 89 A.2d 548, 41 A.L.R.2d 1; Welcome Wagon v. Haschert, 125 Ind.App. 503, 127 N.E.2d 103; 17 C.J.S. Contracts § 289(a); Hauser v. Harding, 126 N.C. 295, 36 S.E. 586.

The defendant stressfully contends the time period (five years) after separation from the plaintiff's employment is unreasonable and renders the contract void. She relies heavily on Welcome Wagon v. Morris, decided by the U. S. Court of Appeals for the Fourth Circuit and reported in 224 F.2d 693. While there are minor factual differences between this and the Morris case, nevertheless we confine comment to the simple statement that, in our opinion, that decision does not follow the general rule and is not based on the sounder reasoning. The general rule is stated in 9 A.L.R., p. 1468: 'It is clear that if the nature of the employment is such as will bring the employee in personal contact with patrons or customers of the employer, or enable him to acquire valuable information as to the nature and character of the business and the names and requirements of the patrons or customers, enabling him, by engaging in a competing business in his own behalf, or for another, to take advantage of such knowledge of or acquaintance with the patrons and customers of his former employer, and thereby gain an unfair advantage, equity will interpose in behalf of the employer and restrain the breach * * * providing the covenant does not offend against the rule that as to time * * * or as to the territory it embraces it shall be no greater than is reasonably necessary to secure the protection of the business or good will of the employer.' Baumgarten v. Broadaway, 77 N.C. 8; Baker v. Gordon, 86 N.C. 116; Cowan v. Fairbrother, 118 N.C. 406, 24 S.E. 212, 32 L.R.A. 829; Kramer v. Old, 119 N.C. 1, 25 S.E. 813, 34 L.R.A. 389; King v. Fountain, 126 N.C. 196, 35 S.E. 427; Hauser v. Harding, supra; Jolly v. Brady, 127 N.C. 142, 37 S.E. 153; Anders v. Gardner, 151 N.C. 604, 66 S.E. 665; Wooten v. Harris, 153 N.C. 43, 68 S.E. 898; Faust v. Rohr, 166 N.C. 187, 81 S.E. 1096; Morehead Sea Food Co. v. Way, 169 N.C. 679, 86 S.E. 603; Bradshaw v. Millikin, 173 N.C. 432, 92 S.E. 161, L.R.A.1917E, 880; Mar-Hof Co. v. Rosenbacker, 176 N.C. 330, 97 S.E. 169.

The foregoing cases in the main refer to covenants ancillary to contracts of sale, etc. See 36 Am.Jur., § 58, p. 537, et seq. The courts likewise recognize as valid contracts not to engage in competition with employer after termination of service. 36 Am.Jur., § 79, p. 555, et seq. In Scott v. Gillis, 197 N.C. 223, 148 S.E. 315, 317, this Court held: 'At least where the character of the business and the nature of the employment are such that the employer requires such protection, an agreement by an employee not to engage in business in competition with the employer after the termination of the employment, is valid if it is reasonable under the circumstances.' The same rule is approved in Moskin Bros. v. Swartzberg, 199 N.C. 539, 155 S.E. 154. In Comfort Spring Corp. v. Burroughs, 217 N.C. 658, 9 S.E.2d 473, the Court recognized, as valid, the rule in the Scott and Moskin cases but refused to restrain the defendant because of plaintiff's failure to allege sufficient material facts. Beam v. Rutledge, 217 N.C. 670, 9 S.E.2d 476; Delmar Studios of Carolinas, Inc. v. Goldston, 249 N.C. 117, 105 S.E.2d 277.

In the cases cited and others, restrictive covenants have been approved for periods ranging from one to 20 years, and in one instance for the life of the covenanter. For list of cases, see N.C.L.R., Vol. 38, p. 396 (1959-60). Research has not disclosed, and the defendant has not cited, any decision of this Court in which five years duration has been declared sufficient to avoid a restrictive covenant. According to the allegations, the plaintiff was established in business at the time the defendant executed the written contract and entered plaintiff's employment. She resigned after receiving the benefits for several years, began a competitive business immediately, and took with her all of plaintiff's customers. In short, she took over plaintiff's business. The actual result appears to furnish a valid reason for the covenant. 'There is no ambiguity in the restrictive covenant. It was inserted for the protection of the plaintiff, and to inhibit the defendant, for a limited time, from doing exactly what he now proposes to do. Orkin Exterminating Co. v. Wilson, 227 N.C. 96, 40 S.E.2d 696. The parties regarded it as reasonable and desirable when incorporated in the contract. Subsequent events, as disclosed by the record, tend to confirm, rather than refute, this belief.' Sonotone Corp. v. Baldwin, 227 N.C. 387, 42 S.E.2d 352, 354.

Upon the allegations of the complaint, which the proof may or may not sustain, the court should have overruled the demurrer, permitted the defendant to answer, and continued the restraining order to the hearing. The judgment of the court below is

Reversed.

BOBBITT, Justice (dissenting).

The demurrer admits, solely for the purpose of testing the sufficiency of the complaint, plaintiff's factual allegations. Defendant's conduct, under the facts alleged, was and is in violation of the terms of the restrictive covenant. The only question for consideration is whether the restrictive covenant is valid and enforceable.

Covenants restricting employment tend to lessen the opportunity of the person so restricted to earn a livelihood and to deprive the community of the benefit of competition. Morehead Sea Food Co. v. Way, 169 N.C. 679, 86 S.E. 603. Such covenants 'are looked upon with disfavor in modern law.' Kadis v. Britt, 224 N.C. 154, 29 S.E.2d 543, 546, 152 A.L.R. 405. They are upheld only if founded on a valuable consideration, are reasonably necessary to protect the legitimate interests of the covenantee, do not impose unreasonable hardship upon the covenantor, and do not unduly prejudice the public interest. Henley Paper Co. v. McAllister, 253 N.C. 529, 117 S.E.2d 431, and cases cited; Comfort Spring Corp. v. Burroughs, 217 N.C. 658, 9 S.E.2d 473; 17 C.J.S. Contracts § 254; 28 Am.Jur., Injunctions § 105; Restatement, Contracts § 516(f). To be upheld, such a restrictive covenant must be reasonably limited both in respect of time and territory. Sonotone Corp. v. Baldwin, 227 N.C. 387, 42 S.E.2d 352.

'Covenants by employees not to compete with their former employer are more carefully scrutinized by the courts, and relief more readily denied, than similar covenants ancillary to the sale of a business, since enforcement of the former may deprive the covenantor of the means of livelihood.' 28 Am.Jur., Injunctions, § 105; 17 C.J.S. Contracts § 254; 41 A.L.R.2d 30-33; 43 A.L.R.2d 111-115; Restatement, Contracts § 515, Comment b; 38 N.C.L.R. 399.

In Kadis v. Britt, supra, Seawell, J., says: 'From the beginning the argument against restraint of employment was--and still is--more powerful than those based on the evils of monopoly incident to restrictions in sales contracts.' Ordinarily, in respect...