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Supreme Court of Arkansas
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No. 85-157
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288 Ark. 218, 703
S.W.2d 862, 1986.AR.0043034< http://www.versuslaw.com>
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February 18, 1986
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BERT S. HYDE, ET AL.
V.
C M VENDING CO.,
INC.
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SYLLABUS BY THE COURT
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1. APPEAL & ERROR - ISSUE RAISED IN REPLY BRIEF NOT CONSIDERED. -
An error raised for the first time in the reply brief will not |
[288 Ark Page 219] be
considered.
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2. CONTRACTS - COVENANT NOT TO COMPETE - NOT INVALID IF REASONABLE. -
A contract in restraint of trade, such as a covenant not to compete, is
not invalid if it is reasonable with respect to time and
place.
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3. CONTRACTS - COVENANT NOT TO COMPETE - REASONABLENESS DETERMINED BY
CIRCUMSTANCES. - The reasonableness of duration of a covenant not to
compete after sale of a business is to be judged in the light of
accompanying circumstances.
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4. CONTRACTS - COVENANT NOT TO COMPETE - DURATIONS APPROVED. - The
supreme court has upheld covenants not to compete lasting five years, ten
years, twenty years, and without time limit.
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5. CONTRACTS - COVENANTS NOT TO COMPETE - EMPLOYMENT CONTRACTS ARE
SUBJECT TO A STRICTER STANDARD. - Covenants not to compete in employment
contracts are subject to a stricter standard than covenants connected with
the sale of a business.
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6. CONTRACTS - COVENANT NOT TO COMPETE - REASONABLE DURATION. - Where
the buyer-company might need time to get on its feet after paying off the
seller before being required to compete with the seller, especially where
the seller did not get completely out of the business but was poised to
resume competition, the covenant not to compete, which was to begin at the
closing of the sale of the business and was to continue until five years
after the seller had been paid in full (between thirteen and fifteen years
later), was of reasonable duration.
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7. APPEAL & ERROR - REVIEW OF EQUITY CASES. - As equity cases are
reviewed de novo, the appellate court may modify an
injunction.
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8. CONTRACTS - NON-PARTIES TO COVENANT ARE NOT LIABLE FOR DAMAGES
RESULTING FROM BREACH. - Appellants who were not parties to the covenant,
are not liable for damages resulting from its breach.
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9. DAMAGES - PROOF OF LOST PROFITS. - The profits earned by the party
allegedly in breach of the covenant are irrelevant to profits which would
have been earned by the appellee had there been no breach.
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Appeal from Pope Chancery Court; Richard Mobley, Chancellor; affirmed
as modified on appeal; affirmed on cross-appeal.
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Gordon & Gordon, P.A., by: Allen Gordon; and Peel & Eddy, by:
Richard Peel, for appellants.
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Mobley & Smith, by: William F. Smith, for appellee.
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The opinion of the court was delivered by: David Newbern, Justice.
[288 Ark Page 220]
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The principal question presented by the appellants is whether a
covenant not to compete, contained in a contract for the sale of a
business, is unreasonable due to its length of duration and thus
unenforceable. The chancellor upheld the provision, and we agree that it
was not of an unreasonable duration under the circumstances presented
here. The appellants further contend the chancellor erred in awarding an
injunction enforcing the covenant against some of them who were not
parties to the contract which contained the covenant. We agree with the
appellants on this point and thus modify the injunction. We also agree
with the appellants' argument that the chancellor erred in awarding
damages for breach of the covenant to the extent the damages were to
accrue after the effective date of the injunction, and we reduce the
damages accordingly.
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[1] On cross appeal, it is contended the chancellor erred in computing
the damages for breach of the covenant. If there was error, it favored the
appellee and was not the error argued by the appellee. Therefore, we
affirm on cross appeal. We will not address the error favoring the
appellee because the appellants did not raise any question of the amount
of damages in their principal brief on appeal. The appellants argue
incorrectness of the court's damages calculation only in their reply brief
responding to the cross appeal. Appellants may not raise an error for the
first time in the reply brief, as the appellee has no opportunity to
respond. Thus we will not consider it. Meyers v. Muuss, 281 Ark. 188, 662
S.W.2d 805 (1984).
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In 1972 Hyde Vending Co., Inc., sold its food and drink vending
business to C M Vending Company, Inc. The Hyde company retained its music
and some of its cigarette vending operation, but it transferred to C M its
food and drink vending machines, trucks, and other equipment, all of which
was listed in an "exhibit" to the contract, and exclusive vending
agreements in certain listed industrial and other plant
locations.
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The covenant not to compete, which was drafted by Hyde's attorneys,
was as follows:
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Hyde and each of its stockholders hereby agrees that from and after
the closing none of them will, without C M's prior written consent,
directly or indirectly own, manage, operate, join, control, or participate
in the ownership, management, operation, or control of, or be connected in
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[288 Ark Page 221]
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any manner with, any business, either directly or indirectly in
competition with C M, or become interested in any competitor of C M,
within a period of five (5) years after payment in full of the purchase
price as herein provided and within a radius of fifty miles of the City of
Russellville, Arkansas; provided, however, that Hyde shall have the right
to maintain certain cigarette vending machines and certain coin operated
record playing music machines as specifically listed and described on
Exhibit "C" attached hereto, and that it and its stockholders may, as a
corporation or as individuals, enter into the music vending machine
business, only, without being in violation of this provision; and provided
further, that C M will not, during the same period herein enter into the
music vending machine business; and, provided further, that either of the
parties hereto may in writing waive any portion or all of this particular
covenant not to compete.
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The stockholders in the Hyde company were Bert Hyde and Nancy Hyde.
Their son, David Hyde, was not a stockholder at the time the covenant not
to compete was entered. He acquired some shares in December, 1978, and
held them only about six months. Thus, David Hyde did not own shares in
the Hyde company at the time the covenant was alleged to have been
breached.
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The C M Company successfully bid for the exclusive food and beverage
vending contract at the Arkansas Nuclear One (ANO) plant in 1979. That
contract expired in 1984 at which time it was obtained by Valley Vending,
Inc., which was owned by David Hyde, Donna Walker, Bert Lynch and Randy
Talkington. The evidence is undisputed that Bert Hyde made unsecured loans
to Valley Vending and advised and assisted the business in other ways
which caused the chancellor to hold the covenant not to compete had been
breached. The appellants do not question the sufficiency of the evidence
to establish breach of the covenant, assuming its validity.
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1. Reasonableness of the Covenant
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The appellants do not contest the reasonableness of the geographical
coverage of the covenant. Rather they say only it is too long in duration.
It began to run at the closing of the sale of the food and beverage
business of Hyde to C M, and it was to continue |
[288 Ark Page 222]
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until five years after C M had paid Hyde in full. Given the contract's
provision that C M would not be allowed to pay the debt completely until
eight years after closing, the minimum duration of the covenant was
thirteen years. As full payment was required within ten years, the
covenant had a maximum duration of fifteen years. It thus was within the
power of C M to extend the duration of the covenant, as it did in this
case, by two years. We note that as the covenant was mutual in nature, the
extension not only gave C M additional protection with respect to food and
beverage vending, but it extended the protection afforded to Hyde with
respect to music and cigarette vending.
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[2-4] A contract in restraint of trade, such as a covenant not to
compete, is not invalid if it is reasonable with respect to time and
place. Bloom v. Home Insurance Agency, 91 Ark. 367, 121 S.W. 293 (1909);
Webster v. Williams, 62 Ark. 101, 34 S.W. 537 (1896). The reasonableness
of duration of a covenant not to compete after sale of a business is to be
judged in the light of accompanying circumstances. Madison Bank &
Trust v. First National Bank of Huntsville, 276 Ark. 405, 635 S.W.2d 268
(1982). This court has upheld such covenants lasting five years, Bledsoe
v. Carpenter, 160 Ark. 349, 254 S.W. 677 (1923); ten years, Madison Bank
& Trust v. First National Bank of Huntsville, supra; twenty years,
Robins v. Plant, 174 Ark. 639, 297 S.W. 1027 (1927); and without time
limit, Wright v. Marshall, 182 Ark. 890, 33 S.W.2d 43 (1930); Hultsman v.
Carroll, 177 Ark. 432, 6 S.W.2d 551 (1928). While the issue in Wright v.
Marshall, supra, was apparently not the duration of the covenant, we
recited the familiar rule that:
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[s]uch contracts are intended to secure to the purchaser the good will
of the business; and, as a guaranty, the vendor agrees not to engage in
like business at that place. The courts recognize that in such cases the
vendor has received an equivalent to abstain from business at the place
where it was formerly conducted. [182 Ark. at 891-892, 33 S.W.2d at
44.]
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[5] The only cases cited by the appellant in which we have refused to
uphold covenants not to compete have been employment contracts to which we
apply a stricter standard. See Madison Bank & Trust v. First National
Bank of Huntsville, |
[288 Ark Page 223]
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supra.
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[6] The seller of a business who finances the sale by, in effect,
lending the purchase money to the buyer has an obvious incentive not to
compete with his buyer while some of the purchase price is still owed to
him. The seller logically wants the buyer to succeed so he can pay off the
debt to the seller and not jeopardize the contract of sale. We can imagine
many situations in which it would be reasonable for a company just getting
on its feet after paying off the seller to need more time to establish
itself before being required to compete with the seller. More importantly,
however, in this case the seller did not go out of the vending machine
business. Hyde retained the music and cigarette business as well as a
kitchen which at one point was rented to Valley Vending, Inc., when Valley
began to compete with C M. Thus, unlike the seller who rids himself of the
tools of his trade, the contacts, and the "good will" of the operation,
Hyde remained poised to resume food and beverage vending. Under these
circumstances the covenant not to compete was of reasonable duration. We
are not persuaded by the appellants' argument that C M had no protectable
interest, such as trade secrets, customer lists, or special licenses. In
some of the sale of business cases noted above we approved covenants not
to compete where the business was no less mundane or more secretive or
specialized than the vending machine business, e.g., Bledsoe v. Carpenter,
supra, (tailoring, cleaning and pressing); Robins v. Plant, supra, (cotton
gin); Wright v. Marshall, supra, (restaurant).
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2. The Injunction
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[7] The chancellor enjoined breach of the covenant. The judgment does
not specify to whom the injunction is directed. To the extent it may be
considered to enjoint the non-corporate, individual appellants from
breaching the contract, it must only apply to Bert and Nancy Hyde, as they
are the only appellants who are parties to the contract. The other
non-corporate, individual appellants however, as well as Valley Vending,
Inc., should be enjoined only from aiding or abetting Bert or Nancy Hyde
from breaching the contract. See Daughtry v. Capital Gas Co., 285 Ala. 89,
229 So.2d 480 (1969). As equity cases are reviewed de novo, Apple v.
Cooper, 263 Ark. 467, 565 S.W.2d 436 (1978), this court may modify the
injunction. |
[288 Ark Page 224]
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3. Damages
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The appellants devote two points in their principal brief to damages.
First, they contend no damages should have been awarded due to the
invalidity of the covenant. As we hold the covenant to be valid, we need
not go further on that point. Second, they contend the court awarded an
injunction as well as damages which would result from conduct enjoined; in
other words, these are damages for future misconduct in which the
appellants will be unable to engage if the injunction stands. In
particular, the court found C M would have gotten not only the ANO
contract beginning September 1, 1984, but would have obtained a renewal of
it September 1, 1987. The court added $22,476.30 for profits C M would
lose in the three and one-half months from the renewal of the contract on
September 1, 1987, until the covenant not to compete expired December 15,
1987. As the injunction will prohibit Bert and Nancy Hyde and Valley
Vending, Inc., from competing with C M, they will not be allowed to renew
the contract with ANO. The judgment is thus modified by reducing the
damages awarded for loss of the ANO contract from $253,661.13 to
$231,184.83.
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[8] The chancellor's judgment recited that the damages were awarded
against all of the appellants for "breach of the covenant." The appellee
argues that, as only Hyde Vending Co., Inc., Bert Hyde and Nancy Hyde were
parties to the covenant, the damages awarded jointly and severally against
the other individual appellants must have been based on some tort theory
such as intentional interference with a contractual relationship. There is
no indication from the record and certainly none from the judgment that
any such liability was determined. As the appellants other than Hyde
Vending Co., Bert Hyde and Nancy Hyde were not parties to the covenant,
they are not liable for damages resulting from its breach, and the
judgment must be modified in this respect as well.
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4. Cross Appeal
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In calculating the damages to C M for loss of the ANO contract, the
court used the gross profit C M had made in the last three years of its
contract with ANO and allowed a recovery of 25 percent, presumably as a
reasonable net profit loss. The court found C M made a gross profit, less
ten percent commission to |
[288 Ark Page 225]
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ANO, of $924,739.31 over thirty-six months. Twenty-five percent of
that figure was found to be $231,184.83. Dividing by 36, he obtained a
monthly profit figure of $6,421.80.
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[9] The appellee contends the percentage to be used should have been
44.64 percent rather than 25 percent because Valley Vending, Inc., was
making that much more gross profit. It is enough to say that the profits
earned by the party allegedly in breach of the covenant are irrelevant to
profits which would have been earned by the appellee had there been no
breach. Sumlin v. Woodson, 211 Ark. 214, 199 S.W.2d 936
(1947).
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5. Conclusion
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The injunction is modified to enjoin appellants Bert Hyde and Nancy
Hyde from further breaching the covenant not to compete and to enjoin
Valley Vending, Inc., Donna Walker, David Hyde, Bert Lynch and Randy
Talkington from aiding or abetting Bert or Nancy Hyde in breaching the
covenant not to compete. Damages from the appellants to the appellee are
reduced from $253,661.13 to $231,184.83. The decree is further modified to
reflect that these damages are awarded jointly and severally against Hyde
Vending Co., Inc., and its stockholders, i.e., Bert Hyde and Nancy Hyde,
but not against the other appellants. The judgment of the trial court is
otherwise affirmed on appeal. We also affirm on cross
appeal.
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PURTLE, J., not participating.
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