Young v. Van Zandt

• Decision Date: 23 May 1983
• Docket Number: No. 1-782A165,1-782A165
• Citation: 449 N.E.2d 300
• Parties: Donald R. YOUNG, Mary A. Young and A & D Development Corporation, an Indiana Corporation, Defendants-Appellants, v. Gary M. VAN ZANDT and Van Zandt Enterprises, Inc. d/b/a A & D Development Company, an Indiana Corporation, Plaintiffs-Appellees.
• Court: Indiana Appellate Court

Page 300

449 N.E.2d 300

Donald R. YOUNG, Mary A. Young and A & D Development

Corporation, an Indiana Corporation, Defendants-Appellants, v. Gary M. VAN ZANDT and Van Zandt Enterprises, Inc. d/b/a A &

D Development Company, an Indiana Corporation,

Plaintiffs-Appellees.

No. 1-782A165.

Court of Appeals of Indiana,

First District.

May 23, 1983.

Charles C. Griffith, Leslie C. Shively, Johnson, Carroll & Griffith, Evansville, for defendants-appellants.

James F. Flynn, Newman, Trockman, Lloyd, Flynn & Rheinlander, P.C., Evansville, for plaintiffs-appellees.

RATLIFF, Judge.

STATEMENT OF THE CASE

Appellants Donald and Mary Young and A & D Development Corporation (A & D) appeal from a judgment of the Vanderburgh Superior Court enforcing the terms of a covenant not to compete and awarding liquidated damages. Additionally, appellees Gary VanZandt and VanZandt Enterprises, Incorporated cross-appeal from the court's judgment on their breach of warranty claim. We affirm in part and reverse in part.

FACTS ¹

After considerable negotiation, Gary VanZandt and VanZandt Enterprises, Incorporated, purchased an on-going concern known as A & D Development Corporation from Donald and Mary Young. As part of A & D was involved in waste disposal and the commercial sandblasting and painting of industrial steel. However, the waste disposal represented only about one quarter ( 1/4) of A & D's business. The other three quarters ( 3/4) of the business involved the sandblasting and painting operation, and better than eighty-five percent (85%) of A & D's sandblasting and painting work came from one account--Mesker Steel. VanZandt testified that the covenant not to compete was drawn in terms of five (5) years and two hundred (200) miles in order to protect the Mesker Steel account, largely because of the close personal relationship between Donald Young and Richard Durrett, Mesker's General Manager.

the sale agreement, Donald Young agreed to work for A & D for one year from the date of the sale. He also agreed to be bound by a covenant not to compete. The covenant bound Young not to compete, directly or indirectly, with A & D for a period of five (5) years anywhere within two hundred (200) miles of Evansville, Indiana.

Young quit several months after the sale and eventually went to work for Mesker. Several other employees of A & D either quit or were fired after the sale and went to work for either Young personally or for Mesker. Sam Young, Donald's brother, quit and, with Donald's financial backing, set up his own waste removal business in Illinois some one hundred seven (107) miles distant but within two hundred (200) miles of Evansville. Finally, after increasing difficulties on a particular job Mesker had subcontracted to A & D, Mesker terminated its business with A & D and sent its steel to Chicago.

VanZandt and VanZandt Enterprises, Incorporated brought suit for enforcement of the covenant not to compete. They also sued for damages claiming that Youngs and A & D had breached certain warranties concerning the worthiness of equipment and the existence of pending or threatened litigation. The court found for VanZandt and VanZandt Enterprises on the breach of covenant claim, ² and awarded liquidated damages as set forth in the contract. The court found against VanZandt and VanZandt Enterprises as to the breach of warranty claims. From this judgment, both parties now appeal.

ISSUES

Appellants present three issues for review. However, one of the issues is dispositive of this appeal, and we, therefore, deal with it alone. Rephrased, it is as follows:

Did the trial court err, as a matter of law, in enforcing the covenant not to compete?

Appellees on their cross-appeal raise two issues for review. Rephrased, they are as follows:

1. Did the trial court err in concluding that Young did not breach warranties to VanZandt concerning the transfer of equipment pursuant to the sale agreement?

2. Did the trial court err in concluding that Young did not breach warranties concerning the existence of pending or threatened litigation?

DISCUSSION AND DECISION

APPELLANTS' ISSUE

The trial court erred, as a matter of law, in enforcing the covenant not to compete.

We begin by noting that covenants not to compete are in restraint of trade, and are, therefore, not favored by the law. Licocci v. Cardinal Associates, Inc., (1983) Ind., 445 N.E.2d 556, 561; Captain & Co., Inc. v. Towne, (1980) Ind.App., 404 N.E.2d 1159, 1161; Frederick v. Professional Building Maintenance Industries, Inc., (1976) 168 Ind.App. 647, 648, 344 N.E.2d 299, 301. They are also strictly construed against the covenantee. Donahue v. Permacel Tape Corp., (1955) 234 Ind. 398, 404, 127 N.E.2d 235, 237. However, a covenant will be enforced where it is reasonable. Id. at 408, 127 N.E.2d at 238-39, citing Williston on Contracts, Sec. 1636 pp. 4580-81; Frederick; Struever v. Monitor Coach Co., Inc., (1973) 156 Ind.App. 6, 8-9, 294 N.E.2d 654, 656, trans. denied. While reasonableness is a matter to be decided by the court, Ross Clinic, Inc. v. Tabion, (1981) Ind.App., 419 N.E.2d 219, 221 (transfer pending); Raymundo v. Hammond Clinic Association, (1980) Ind.App., 405 N.E.2d 65, 68; Frederick, it ultimately resides in the facts and circumstances of each individual case. Licocci; Unishops, Inc. v. May's Family Centers, Inc., (1980) Ind.App., 399 N.E.2d 760, 764, trans. denied. However, the measure of reasonableness varies depending upon the type of covenant involved.

Employee covenants not to compete differ from covenants involved in the sale of a business. ³ In the former, the covenant is deemed to be reasonable where (1) the restraint is reasonably necessary to protect the employer, (2) it is not unreasonably restrictive of the employee, and (3) it is not against public policy. Slisz v. Munzenreider Corp., (1980) Ind.App., 411 N.E.2d 700, 704, trans. denied. See also Donahue, 234 Ind. at 408, 127 N.E.2d at 239. Whether the covenant is unreasonably restrictive of the employee is measured in terms of time, space, and the activity or conduct prohibited. Raymundo; Frederick. In the latter, the covenant is deemed to be reasonable and, thus, enforceable where it is limited to the "area of the business involved...." Donahue, 234 Ind. at 405, 127 N.E.2d at 238. Reasonableness is again measured in terms of time, space, and prohibited activity. Where the sale of a business is involved, the interest to be protected relates to the good will of the business. Donahue, 234 Ind. at 406, 127 N.E.2d at 238. "If for any reason the restraint is greater than necessary to protect the good will, the contract is invalid." Donahue, 234 Ind. at 406, 127 N.E.2d at 238, quoting 2 Page on Contracts, Sec. 789 p. 1389. While covenants involved in the sale of a business are not as ill-favored at law as are employee covenants, see Seach v. Richards, Dieterle & Co., (1982) Ind.App., 439 N.E.2d 208, 215, they are, never-the-less, also subject to the test of reasonableness and will not be enforced where found to be unreasonable.

Where the trial court could find the covenant not to compete unreasonable under any set of facts, it will be deemed to be unenforceable. See 4408, Inc. v. Losure, (1978) 175 Ind.App. 658, 660, 373 N.E.2d 899, 900-01. If the covenant is not reasonable as written, the court may not create a reasonable restriction under the guise of interpretation, since this would subject the parties to an agreement they had not made. Licocci; Donahue, 234 Ind. at 413, 127 N.E.2d at 241. "However, if the covenant is clearly separated into parts and some parts are reasonable and others are not, the contract may be held divisible. The reasonable restrictions may then be enforced." Licocci, 445 N.E.2d at 561 citing Welcome Wagon, Inc. v. Haschert, (1955) 125 Ind.App. 503, 508-09, 127 N.E.2d 103, 106. See also Seach (enforcing the covenant to the extent of the legally enforceable terms is consistent with what is known as the "blue-pencil" doctrine). But cf. Frederick (court refused to strike counties that covenantor had not worked in from those listed in restrictive covenant, concluding that parties could not be subject to an agreement which they had not made). It is manifest that such judicial redaction may not add terms to the contract and must restrict itself to the application of existing terms. Seach, 439 N.E.2d at 214-15. See also Donahue. Where the covenant is both unreasonable and incapable of redaction, it will be unenforceable.

In the instant case VanZandt's attorney drafted the following covenant not to compete as part of the sales agreement:

"Sellers will not directly or indirectly engage in any activity or enterprise in competition with or against Buyers for a period of 5 years from this date and in a circular geographic area, the outer [sic] of which is the intersection of Division Street with U.S. Highway 41 in Evansville, Vanderburgh County, Indiana, and the radius of which is 200 miles long."

Record at 530. VanZandt testified that the 200 mile radius was included because he deemed it unreasonable to expect Mesker to go a greater distance to have their work done. While this might be a reasonable basis for setting the geographic limits of the covenant as far as the sandblasting and painting operations and the preservation of the Mesker Steel account are concerned, something which we need not decide, we cannot help but note that the covenant prohibits sellers from engaging in "any activity or enterprise in competition with or against Buyers." Id. It is clear that this would include waste disposal as well. Undisputed evidence at trial indicated that the waste disposal portion of the business was confined to the Evansville area. The covenant was clearly unreasonable in its application to the waste disposal portion of the business and, therefore, unenforceable unless capable of redaction.

In order to strike unenforceable portions of a covenant not to compete, the covenant must be capable of...