Westec Sec. Services, Inc. v. Westinghouse Elec.

• Decision Date: 12 May 1982
• Docket Number: Civ. A. No. 81-0303.
• Citation: 538 F. Supp. 108
• Parties: WESTEC SECURITY SERVICES, INC. v. WESTINGHOUSE ELECTRIC CORPORATION.
• Court: U.S. District Court — Eastern District of Pennsylvania

538 F. Supp. 108

WESTEC SECURITY SERVICES, INC. v. WESTINGHOUSE ELECTRIC CORPORATION.

Civ. A. No. 81-0303.

United States District Court, E. D. Pennsylvania.

April 1, 1982.

As Amended May 12, 1982.

COPYRIGHT MATERIAL OMITTED

John P. O'Dea, Stradley, Ronon, Stevens & Young, Philadelphia, Pa., for plaintiff.

Edward W. Mullinix, Schnader, Harrison, Segal & Lewis, Philadelphia, Pa., for defendant.

OPINION

LOUIS H. POLLAK, District Judge.

Westec Security Services, Inc. ("Westec"), the plaintiff in this matter, seeks to enforce a covenant not to compete against defendant Westinghouse Electric Corporation ("Westinghouse"). A bench trial on the merits has been completed, and what follow are my final findings of fact and conclusions of law.

Plaintiff is a corporation organized under California law, and its principal place of business is in that state. Defendant is a corporation organized under Pennsylvania law with its principal place of business in Pennsylvania. The amount in controversy, exclusive of interest and costs, exceeds $10,000., and the diversity jurisdiction of this court, is therefore, properly invoked pursuant to 28 U.S.C. § 1332(a)(1).

For a ten year period from 1969 to 1979, defendant was engaged in the residential security business through its sole ownership of Westinghouse Security Systems, Inc. ("WSSI"). By an agreement dated July 19, 1979, Westinghouse sold to plaintiff, then named Certified Security Services, Inc., all of the stock of WSSI. The agreement contains the following covenant:

COVENANT NOT TO COMPETE. Stockholder Westinghouse agrees not to reestablish or reopen any business or trade which provides security systems or services similar to that provided by the business hereby sold, or in any manner to become interested, directly or indirectly, either as owner, partner, joint venturer, agent, stockholder (other than as a passive, nonmanaging investor) or otherwise, in any such business or trade for a term of twenty years from the date hereof or such shorter period that a court of competent jurisdiction, may find to be reasonable in the case of any dispute. Should any court of competent jurisdiction find this covenant to be unreasonable under the laws of such jurisdiction, then any finding of a shorter period of restriction shall apply only to the jurisdiction of such court and shall not serve to amend this Agreement in any other jurisdiction.

This covenant shall not be construed to prohibit, however, Westinghouse from continuing any business which it now conducts which may provide institutional, industrial, or governmental security services or systems. (P-21, p. 30, ¶ 16)

Closing on the agreement of sale took place on August 31, 1979.

Some fifteen months later, in November, 1980, Westinghouse, two wholly owned subsidiaries of Westinghouse, and Teleprompter Corporation ("Teleprompter") entered into a plan of acquisition and merger whereby Teleprompter became, in August, 1981, a wholly owned subsidiary of Westinghouse. Teleprompter's principal business is the operation of cable television franchises throughout the country.

Among the features which Teleprompter has recently begun to offer prospective subscribers to its cable television systems are home security systems and services. These systems would use the Teleprompter system's t.v. cable to link various types of alarm devices—burglary, fire and medical emergency—in subscribers' homes with central monitoring stations.¹ Teleprompter plans to provide subscribers with home security systems and services through a variety of business arrangements. In some instances, it envisions leasing a cable channel to an independent residential security company which would, in turn, offer to sell home security equipment to subscribers, install it in their homes, and provide both maintenance and monitoring services. In other instances, Teleprompter plans to contract with independent companies to carry out some or all of these activities. And in still other cases, Teleprompter may undertake all of these activities itself.

Plaintiff contends that all of these various forms of involvement in the residential security business are barred to Teleprompter under the terms of the Westec-Westinghouse covenant not to compete. Defendant does not contest the covenant's validity as such—it concedes that the covenant was ancillary to the sale of a business—but it argues that the covenant's terms do not embrace any of the activities in the residential security field to which Teleprompter is committed or on which it soon plans to embark. In other words, the parties' dispute has focused upon the nature and scope of the business sold by defendant to plaintiff in 1979 and on whether that business's activities may be said to have been "similar" to those planned by Teleprompter. Therefore, I begin my more detailed recitation of factual findings by turning to WSSI's history.

I.

A. The History of Westinghouse Security Systems, Inc.

Westinghouse established WSSI as a wholly owned subsidiary in 1969, and through it embarked on the business of marketing residential security systems and services. As already noted, residential security systems consist of an array of electronic devices installed in homes and designed to detect burglary, smoke, fire and other emergencies.² These devices transmit electronic signals or "data" to a central monitoring station equipped with computers which decode the data. In the event of an emergency, such as a fire, the appropriate "detector" is triggered; it sounds an in-home alarm and also transmits signals alerting personnel at the monitoring station that a fire has occurred at that location. The monitoring personnel in turn summon appropriate aid from local authorities. While the home security systems Teleprompter has begun to offer would link home and monitoring stations through a television cable, WSSI's systems utilized telephone cables for that purpose, as do Westec's systems today.

Throughout its history, WSSI itself manufactured only a small fraction of the parts composing the home security and monitoring systems which it marketed. It purchased the rest from Ascensores Westinghouse, a Westinghouse subsidiary in Puerto Rico, and from other manufacturers—testing and, where necessary, assembling such parts before shipping them to its market outlets. The greater portion of WSSI's management's energies was devoted to an ultimately unsuccessful quest for a profitable way of marketing the firm's products (P-3, P-19).

Initially, WSSI set out to market its residential security systems through franchise operations, and by 1971 it had established twenty-three franchises with twenty-five year franchise agreements. However, in 1971, WSSI management decided to abandon the use of franchises in favor of five-year term distributorships on the one hand, and company-owned retail outlets on the other³ (P-3, P-19). Both distributors and company-owned outlets sold home security equipment to consumers and also provided installation, maintenance and monitoring services. From its retail outlets WSSI derived revenue from all of these activities, including monthly billings for monitoring by central communication centers. From its distributors WSSI's revenue took the form of equipment sales.

By 1976, WSSI appeared to have settled upon a strategy of "going to market" "through two primary channels"—(1) retail outlets and distributorships, and (2) equipment sales to builders of condominiums and apartment buildings (P-19, P.III-2). WSSI management's scheme grouped its retail outlets and distributorships in a single "channel" because both sold to the same customers, home dwellers, and competed with the same companies (id.).

Finally, in 1977, because its retail outlets were not proving profitable, WSSI decided to sell them. Generally, they were sold to buyers who became WSSI distributors. At this point, defendant's strategy was either (1) to make WSSI's business—conducted chiefly now via its distributor network— profitable by 1979;⁴ or (2) to divest itself of WSSI by the end of that year.

Throughout its ten-year history WSSI's marketing strategy emphasized that what the company offered for sale to the consumer was not discrete pieces of equipment, but a residential security "system" embracing all the various services which the system required—installation, maintenance, and monitoring through a central communication center. Indeed, WSSI considered its competitive strength to rest (1) in this "total system" approach; and (2) in the "Westinghouse" name which distinguished its product in the residential security market as the sole system enjoying a widely recognized corporate name and one with a reputation for reliability (P-25, P-26, P-28, P-30).

During the period 1977-79, after the sale of its retail outlets, WSSI continued to advertise and promote its product as a total "system" and array of services, and it continued to urge its distributors to do the same, encouraging them to use liberally the Westinghouse name and "logos." Having sold its retail outlets, WSSI no longer sold directly to consumers, and no longer provided installation, maintenance or monitoring services itself. WSSI's distributors provided these services and derived the revenue they generated. However, WSSI continued to train its distributors and their personnel in selling, installing, repairing and monitoring home security systems (P-6).

B. The Sale of WSSI to Westec

In 1978, defendant began an intensive search for potential purchasers of WSSI. In December, 1978, Warren Mathis, WSSI's president, met with Thomas Kenworthy and Ron Newlin, plaintiff's chairman and president, and told them that Westinghouse had adopted a new corporate strategy—to divest itself of such retail market-oriented business as WSSI—and that if WSSI were not sold by July, 1979, it would be closed (N.T. 1.149-151, N.T. 2.45).

In the spring and summer of 1979, in the wake of an unsuccessful negotiation to sell WSSI to...