Summary
holding defendants breached non-compete covenant by forming and holding stock in competing corporation
Summary of this case from Phelps Staffing, LLC v. S.C. Phelps, Inc.Opinion
(September Term, 1896.)
Contract — Sale of Good Will — Restrain of Trade — Validity of Contract — Breach of Contract — Injunction.
1. One who by his skill and industry builds up a business acquires a property in the good will of his patrons which is the product of his own efforts and he has the power to sell his right of competition to the full extent of the field from which he derives his profit, and for a reasonable length of time.
2. An agreement by vendors of property and business that they will not continue the business in the town in which the property is located will be upheld as restricting the vendors from engaging in such business in such place for the lives of each and every one of them, and is not invalid as being in restraint of trade for an unreasonable length of time.
3. Where the vendors of a property and business stipulate that they will not engage in the same business in the same place thereafter, neither of them has the liberty to take stock in or help to organize or manage a corporation formed to compete with the purchaser.
4. A single consideration of paying a specified sum of money by one party to a contract is sufficient to support several distinct stipulations by the other party to do or to refrain from doing certain things, and it is unnecessary to repeat in every paragraph of the contract that such stipulations are entered into for the consideration once expressed. Hence:
5. Where vendors sold their property and business, and stipulated with the purchaser that they would not thereafter engage in the same business at the same place, the latter stipulation was not without consideration because the property sold was worth all that was paid for it.
6. Where vendors of property and business who agreed not to conduct the same business in the same place thereafter joined with others in forming a corporation for such purpose, only such vendors, and not the corporation or other stockholders, will be enjoined from engaging in or taking stock in or assisting in the organization of such corporation.
ACTION by C. E. Kramer and others against James Y. Old, W. T. Old, W. N. Old and the Elizabeth City Manufacturing Company, to enjoin defendants from engaging in the milling business in Elizabeth City, pending in PASQUOTANK, and heard before Timberlake, J., at chambers, at Currituck Court-House, on 7 September, 1896, on motion to continue the restraining order theretofore granted.
His Honor continued the restraining order until the hearing, (7) and the defendants appealed.
W. J. Griffin for defendants (appellants).
E. F. Aydlett for plaintiffs.
The courts in later years have disregarded the old rules by which it was sometimes attempted arbitrarily to fix by measurement the geographical area over which a contract in partial restrain of trade might be made to extend, and to prescribe a limit of time beyond which it could not be made to operate.
The modern doctrine is founded upon the basic principles that one who, by his skill and industry, builds up a business, acquires a property at least in the good will of his patrons, which is the product of his own efforts ( Cowan v. Fairbrother, 118 N.C. 406), and has the fundamental right to dispose of the fruits of his own labor, subject only to such restrictions as are imposed for the protection of society either by express enactments of law or by public policy. Hughes v. Hodges, 102 (8) N.C. 239; Bruce v. Strickland, 81 N.C. 267. But the property which one thus creates by skill, or talent and industry, is not marketable, unless the owner is at liberty to sell his right of competition to the full extent of the field from which he derives his profit, and for a reasonable length of time. Cowan v. Fairbrother, supra; 2 High Inj., sec. 1174; Cloth Co. v. Lorsant, 39 L.J.N.S. Eq., 86; Rousilon v. Rousilon, 14 Ch. D., 351; Clark on Contracts, p. 451. To the extent that the assignor of this species of property is left at liberty to come into competition with the assignee the market value of what is sold must fall below that of the untrammeled right of freedom from competition in the whole field from which the former derived the support of his business. The test of the reasonableness of the territorial limit covered by such contracts is involved in the question whether the area described in the contract is greater than it is necessary to make it in order to protect the purchaser from competition in his efforts to hold and get the full benefit of the business or right of competition bought by him. The three defendants, who sold to the plaintiff, retained the undisputed right to continue in the same business and operate at any point beyond Elizabeth City and the vicinity, and exercised it by operating their mills.
But in our case it was not contended that the areas of territory covered by the restrictive agreement was so unreasonably great as to vitiate the contract, but that the time for which the defendants covenanted to refrain from entering into the same business imposed an unnecessary restriction upon the rights of the three defendants, and was therefore contrary to public policy and void. It must be conceded that in so far as it is consistent with the power to sell the property which is the creation of one's own labor, physical or mental, society has the right to claim an open field for every man's labor, skill and competition with others, both for the benefit of his family and the more direct benefits accruing (9) to society from removing restrictions and encouraging competition in every kind of trade. The reason of the law leads to the adoption of any rule that is calculated to reconcile all conflicts between the proper exercise of the jus disponendi of the individual and the interests of society at large. The services of no one person are so valuable to the public, in any field to which his business may extend, as to demand that he shall receive a smaller price for his right of competition, because an arbitrary rule forbids him to extend the restriction in point of time to the term of his own life, or that of the purchaser, or for their joint lives. The enlargement of the restrictive area by later adjudications is founded, therefore, upon a principle which it was reasonable to apply in determining what is the lawful limit of time. Where the contract is between individuals or between private corporations, which do not belong to the quasi-public class, there is no reason why the general rule that the seller should not be allowed to fix the time for the operation of the restriction so as to command the highest market price for the property he disposes of should apply. Diamond Match Co. v. Roeber, 106 N.Y. 473; Morgan v. Perhamus, 36 Ohio St. 517; Morse v. Morse, 103 Mass. 73.
The stipulation on the part of James Y. Old, W. P. Old and W. N. Old, to quote the exact language of the contract, is, "that they will not continue business of milling in the vicinity of Elizabeth City after 1 September, 1891, and the full completion of this agreement." The contract having been in other respects performed, the agreement is now complete in the sense contemplated by the parties. The three defendants were at most restricted from engaging in the business for the lives of each and every one of them. Such a sale has been upheld upon reason and authority in other courts. The plaintiff bought their (10) right to complete in their own persons in the business to which he succeeded as purchaser. It was not unreasonable that he should insist upon the stipulation that none of the three should interfere while they lived, by competition at the particular place mentioned, either with him as purchaser, or his assignee in law or in fact. In the case of Morgan v. Perhamus, supra, the facts were that a milliner sold her stock and good will, and engaged "not to carry on the business at any time in future at the town of F, or within such distance of said town as would interfere with said business, whether carried on by said L. S. and P. or their successors." The agreement was held to be binding by the Supreme Court, and the seller was enjoined from resuming business. There, as in our case, the time was not described, except as an inhibition on a particular person, with the implication that it should extend to her life. The law would have construed the contract as conferring the right to sell or transmit to a personal representative as a part of the assets of his estate the property bought, whenever the time was found to be coextensive with the lives of the three defendants. Cowan v. Fairbrother, supra; Clark Contracts, p. 454, 455, and note, p. 456; 2 High Inj., Sec. 1345; Lewis v. Langdon, 7 Sim., 422; Bininger v. Clark, 60 Barb., 113. In McClary's Appeal, 58 Penn. St., 51, the agreement, which was held not to be unreasonable, was that a physician who had sold his business and good will to another physician should "never thereafter establish himself as a physician within twelve miles (of his original place of business) without the consent of the purchaser." The contract there, like that under consideration, could be fairly construed in no other way than as operating for the term of the seller's life. These cases and others are cited with approval by text-writers, and seem as a rule to have established (11) the reasonable doctrine contended for by the plaintiff in the States as well as in England. 2 High, supra, sec. 1180; 1 Beach Inj., sec. 462 to 470; Whitaker v. Howe, 3 Bear, 383.
It is elementary learning that the single consideration of paying a specified sum of money by one party to a contract is sufficient to support several distinct stipulations by the other party to do or refrain from doing certain things, and it is unnecessary to repeat in every paragraph of the contract that such stipulations are entered into for the consideration once expressed. It is sufficient to set forth that A has paid or agreed to pay a certain sum, and that B has agreed to do or abstain from doing certain things which may be stated seriatim in separate paragraphs. A case almost exactly in point, because it relates to a somewhat similar agreement, is that of Morse v. Morse, supra.
Though the contract is valid and binding as between the parties, it in no way impairs the right of the defendants who were not parties, to engage in any kind of business in Elizabeth City. But, as a Court of Chancery we must declare that, where injunctive relief is asked, it is the duty of the Court to restrain the contracting parties from violating the spirit as well as the letter of the agreement. Under a fair and just interpretation of its terms, the stipulation meant that the three defendants would not engage in business so as to bring their skill, names and influence to the aid of any competitor carrying on the same trade within the prohibited limits. It was therefore a violation of the contract on the part of the three mentioned, or either of them, to take stock in, help to organize or manage a corporation formed to compete with the plaintiff in his business. Jones v. Hearns, 4 Ch. Div., 636. (12)
While the courts will not restrain a party bound by such a contract from selling or leasing his premises to others to engage in the business which he has agreed to abstain from carrying on, or from selling to them the machinery or supplies needed in embarking in it ( Reeves v. Sprague, 114 N.C. 647), a different rule must prevail when it appears that the prohibited party attempts, not to sell outright to others, but to furnish the machinery or capital, or a portion of either, in lieu of stock, in a corporation organized with a view to competition with the person protected by his contract against such injury. The three contracting defendants have presumably received the full value of the business sold, and which is protected by their own agreement against their own competition, and equity will not allow them, with the price in their pockets, to evade their contract under the thin guise of becoming the chief stockholders in a company organized to do what they can not lawfully do as individuals.
The judgment must be modified so as to restrain only the three defendants who were parties to the original contract from engaging in or from taking stock in or assisting in the organization of a corporation formed with the purpose of carrying on the business of milling in or in the vicinity of Elizabeth City. The order must be vacated as to the other defendants.
MODIFIED AND AFFIRMED.
Cited: Hauser v. Harding, 126 N.C. 299; Shute v. Heath, 131 N.C. 282; Teague v. Shaub, 133 N.C. 465; Disosway v. Edwards, 134 N.C. 257; Anders v. Gardner, 151 N.C. 605; Wooten v. Harris, 153 N.C. 44; Faust v. Rohr, 166 N.C. 191; Finch v. Michael, 167 N.C. 323; Sea Food Co. v. Way, 169 N.C. 683, 685.
(13)