Opinion
No. 99-74625.
January 20, 2000.
OPINION AND ORDER GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT
This matter came before the court on defendant Lincare's November 19, 1999 motion for summary judgment. Plaintiff Glenna M. Bryan filed a response December 13, 1999; and Defendant filed a reply December 21, 1999. Oral argument was heard January 7, 2000. For the reasons set forth below, the court finds the covenant not to compete to be enforceable.
BACKGROUND FACTS
Plaintiff Glenna M. Bryan sought declaratory and injunctive relief based on a covenant not to compete previously entered into with defendant Lincare. Plaintiff and Glenford Bryan, her former husband, sold a durable medical equipment business, Union Medical Health Services, Inc., to defendant Lincare for $2.65 million on March 31, 1998. In the Bryans' subsequent divorce settlement, Plaintiff received approximately $1.1 million, roughly half the purchase price from the sale of the Union business. At the time of the sale of the business, the Bryans' divorce was imminent and certain details of the sale, such as placing funds in escrow, were accomplished with that in mind.
The business specialized in providing oxygen, oxygen equipment, respiratory equipment and related services to users in their homes.
Pursuant to the terms of the sales agreement, Plaintiff is precluded from competing with Lincare for 5 years within a geographical radius of 150 miles of the former Union business.
STANDARD OF REVIEW
Under Rule 56(e) of the Federal Rules of Civil Procedure, summary judgment may be granted "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law."
The court must view the evidence in a light most favorable to the nonmovant as well as draw all reasonable inferences in the nonmovant's favor. See United States v. Diebold, Inc., 369 U.S. 654, 655 (1962); Bender v. Southland Corp., 749 F.2d 1205, 1210-11 (6th Cir. 1984).
The movant bears the burden of demonstrating the absence of all genuine issues of material fact. See Gregg v. Allen-Bradley Co., 801 F.2d 859, 861 (6th Cir. 1986). The initial burden on the movant is not as formidable as some decisions have indicated. The moving party need not produce evidence showing the absence of a genuine issue of material fact. Rather, "the burden on the moving party may be discharged by `showing' — that is, pointing out to the district court — that there is an absence of evidence to support the nonmoving party's case." Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986). Once the moving party discharges that burden, the burden shifts to the nonmoving party to set forth specific facts showing a genuine triable issue. Fed.R.Civ.P. 56(e); Gregg, 801 F.2d at 861.
LAW AND ANALYSIS
Covenants not to compete are found enforceable when they are reasonably limited in time and geography.
It has been long established in English and Michigan common law that a balancing test is used to test the reasonableness or unreasonableness of a contractual restraint of trade. In determining the reasonableness or a restraint under this test, the court weighs 1) the interests of the party in favor of whom the restraint runs; 2) the interests of the party being restrained; and 3) the interests of the public.Woodward v. Cadiliac Overall Supply Co., 396 Mich. 379, 389-90 (1976) (J. Williams, dissenting). In balancing the interests of these patties, the court finds that the agreement is enforceable.
The common law has long recognized the utility of a covenant against competition in connection with the sale of a business. Even during the era when Michigan courts routinely struck employee covenants as contrary to public policy, covenants executed in connection with the sale of a business were found enforceable. See Vogue Cleaners Dryers, Inc. v. Berkowitz, 292 Mich. 575 (1940). From the purchaser's standpoint, a non-competition covenant is indispensable in assuring that the purchaser receives the full value of that which is being purchased.
In this case, Lincare paid $2.65 million for the Union business, which had approximately $770,000 in tangible assets. Thus, the buyer paid almost $2 million for intangibles, or the seller's goodwill. In addition, Lincare could not have and would not have acquired the goodwill of the company without also securing Plaintiff's covenant not to compete. Plaintiff knew that Lincare would not have bought the business without her covenant not to compete. Plaintiff's dep. at 66. There were at least three different offers by Lincare before the Bryans agreed to the sale; and in all three offers, the terms of the covenants not to compete never changed, but the sale price went up each time.
Glenford Bryan, not a party to this action, also signed a covenant not to compete. However, he has since moved to Florida and is operating outside the 150 mile radius covered by the agreement.
Plaintiff has argued that the covenant is an unfair restraint on trade. She further asserted that she received only $26,000 of the $2.6 million purchase price at the time of the sale, although it is undisputed that she later received over $1 million in the divorce settlement as her portion of the couple's assets following the sale of the business to Lincare. Plaintiff asserted that the covenant is "excessive as relates to its term (five years) and geographical scope (150 miles)." Plaintiff's br. at 1.
Plaintiff relied on Standard Crescent City of Surgical Supplies, Inc. v. Mouton, 535 S.O.2d 1301 (1988), a case from the Court of Appeals for the State of Louisiana. Mouton was employed as a salesman for the plaintiff company and compensated on straight commission. He was awarded 6.1% of the company's stock. When the majority shareholders subsequently decided to sell the company, Mouton received $5,500 (6% of the sale price) for his shares and was required to sign a non-compete agreement which covered three years and 250 miles. The appellate court held the agreement unenforceable because Mouton had held only a nominal amount of stock and had been only an employee without managerial rights or obligations. The court found that nominal stock ownership cannot be used as a justification for ignoring the public policy that prohibits agreements of restraints in trade.
In this case it was uncertain at the time of the sale whether any stock certificates had ever been issued by Union. Therefore, at the time of the sale to Lincare, Plaintiff was issued one percent of the shares. She contended that because she was only a nominal shareholder at the time of the sale, Mouton is applicable and the covenant should be found unenforceable.
In this case, however, Plaintiff was involved with the managerial aspects of Union and considered herself not only a key employee, but also one of the two "bosses" to which the other employees reported. Plaintiffs dep. at 39. She further testified that in the hierarchy of Union, "[After her ex-husband] I would be the next best person in line because I had been there the longest." Id. at 40. Although it was her ex-husband who made contacts with physicians, she worked with the physicians' staffs and the patients throughout her fourteen-year employment with Union; and it was she who had more contact with the billing company than her ex-husband did. Id. at 41.
In balancing the interests of Plaintiff and Defendant, the court finds that Plaintiff was well compensated for her agreement not to compete. To hold otherwise would be to preclude Defendant from obtaining the goodwill of the company, for which it paid nearly $2 million. Further, the court finds no disservice to the public interest if finding enforceable this covenant not to compete which was made in connection with the sale of a business.
ORDER
For the reasons set forth above, it is hereby ORDERED that Defendant's November 19, 1999 motion for summary judgment is GRANTED.
John Corbett O'Meara United States District Judge
Date: January 20, 2000