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Arkansas Court of Appeals
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CA 02-391
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80 Ark.App. 284, 95
S.W.3d 13, 2003.AR.0000028 <http://www.versuslaw.com>
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January 15, 2003
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STATCO WIRELESS, LLC APPELLANT
v.
SOUTHWESTERN BELL WIRELESS,
LLC APPELLEE
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APPEAL FROM THE PULASKI COUNTY CIRCUIT COURT, SIXTEENTH DIVISION [NO.
IJ2001-0732] HONORABLE ELLEN BRANTLEY, JUDGE AFFIRMED IN PART AS MODIFIED;
REVERSED IN PART
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The opinion of the court was delivered by: John B. Robbins,
Judge
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In this appeal, we are asked to review an order of the Pulaski County
Circuit Court enjoining appellant from violating the terms of a covenant
not to compete and from misappropriating trade secrets. We affirm, with
slight modification, that part of the order pertaining to the covenant not
to compete, and we reverse that part of the order pertaining to trade
secrets.
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Appellee Southwestern Bell Wireless (SWBW) is in the business of
selling cellular phone service, sometimes referred to as cellular radio
service (CRS) or commercial mobile radio service (CMRS). Its service is
marketed through three primary channels: company stores, national
retailers (such as Best Buy), and exclusive authorized agents. In 1997 and
1998, appellant Statco became an authorized SWBW agent for the Little Rock
and Hot Springs areas, selling and promoting SWBW services exclusively in
return for commissions paid by SWBW. The agency agreements executed by the
parties contained a covenant not to compete in which Statco essentially
promised that, for one year following termination of the agreements, it
would not induce customers to choose the services of a SWBW competitor,
nor otherwise sell or promote services offered by SWBW's
competitors.
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Between 1997 and 2000, Statco became one of SWBW's most successful
agents, enrolling thousands of subscribers. However, disagreements arose
between the two companies over compensation, and Statco notified SWBW
that, beginning March 1, 2001, its stores would become "multi-line"
stores, offering the services of SWBW competitors. SWBW immediately sought
an injunction to enjoin Statco from misappropriating trade secrets and
from violating the contractual covenant not to compete. A trial was held,
and after an extensive hearing involving thirteen witnesses and
seventy-one exhibits, the circuit judge agreed that Statco's decision to
market the services of competing carriers violated the covenant not to
compete and violated the Arkansas Theft of Trade Secrets Act. The judge
entered a twenty-eight-page letter-ruling containing her findings and
entered the following order:
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Statco is permanently enjoined from violating the terms of the
non-compete provisions in its agency agreements, including:
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(1) Entering into any relationship with a SWBW competitor to market,
sell, or distribute CMRS for a period of one year from March 1,
2001;
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(2) Marketing, selling, or distributing CMRS for a SWBW competitor for
a period of one year from March 1, 2001;
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(3) In any manner attempting to contact a SWBW CMRS customer with the
intent or purpose of inducing or encouraging that customer to change
service from SWBW to a SWBW competitor;
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(4) Any further misappropriation of SWBW's trade secrets. Statco filed
a timely notice of appeal from that order, and its first argument on
appeal is that the trial judge erred in ruling that the covenant not to
compete had been violated.
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Covenants not to compete are not favored by the law. Federated Mut.
Ins. Co. v. Bennett, 36 Ark. App. 99, 818 S.W.2d 596 (1991). Nevertheless,
they have been enforced in some instances. See Dawson v. Temps Plus, Inc.,
337 Ark. 247, 987 S.W.2d 722 (1999); Borden, Inc. v. Huey, 261 Ark. 313,
547 S.W.2d 760 (1977); Girard v. Rebsamen Ins. Co., 14 Ark. App. 154, 685
S.W.2d 526 (1985). The burden is on the party challenging the covenant to
show that it is unreasonable. Moore v. Midwest Distrib., Inc., 76 Ark.
App. 397, 65 S.W.3d 490 (2002). Covenants not to compete are reviewed on a
case-by-case basis. Id. We will not reverse a trial court's findings
regarding a covenant not to compete unless the findings are clearly
erroneous. Bendinger v. Marshalltown Trowell Co., 338 Ark. 410, 994 S.W.2d
468 (1999); Jaraki v. Cardiology Assocs., 75 Ark. App. 198, 55 S.W.3d 799
(2001). A finding is clearly erroneous when, although there is evidence to
support it, we are left, upon viewing the entire evidence, with the
definite and firm conviction that a mistake has been made. See Jaraki v.
Cardiology Assocs., supra.
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For a covenant not to compete to be enforced, three requirements must
be met: (1) the covenantee must have a valid interest to protect; (2) the
geographical restriction must not be overly broad; (3) a reasonable time
limit must be imposed. Duffner v. Alberty, 19 Ark. App. 137, 718 S.W.2d
111 (1986). Statco does not challenge the geographic or time restrictions
in the covenant. Instead it argues that: (1) SWBW had no valid interests
to protect; (2) even if SWBW had valid interests to protect, the covenant
was overly broad and not reasonably tailored to protect those interests;
and (3) there was a failure of consideration.
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Where a covenant not to compete grows out of an employment or other
associational relationship, the courts have found an interest sufficient
to warrant enforcement of the covenant only in those cases where the
covenantee provided special training or made available trade secrets,
confidential business information or customer lists, and then only if it
is found that the associate was able to use the information he obtained to
gain an unfair competitive advantage. Duffner v. Alberty,
supra.
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Statco contends that it was provided with no special training by SWBW,
but the evidence was disputed on this point. Statco witnesses testified
that they received only a short video training session at the beginning of
their agency relationship. However, SWBW witnesses testified that agents
were provided with various training opportunities, both formal and
informal. Subjects of training included not only education in the products
and services offered by SWBW, but in sales techniques such as closing,
responding to competitors' promotions, and preventing de-activations
(churn). Conflicts in testimony are to be resolved by the trial court, and
we will defer to that court's superior position to judge and determine the
credibility of witnesses. DeWitt v. Johnson, 349 Ark. 294, 77 S.W.3d 530
(2002). In any event, the furnishing of special training is just one
matter to be considered under the Duffner analysis. We must also consider
whether SWBW made trade secrets, confidential information, or customer
lists available to Statco.
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The trial court found that SWBW had a vital interest in protecting the
confidential information contained in its customer lists, agent
compensation plans, written bid proposals, and marketing strategies, to
which Statco had access during its agency. We do not think the trial
court's finding on this point was clearly erroneous. Customer lists have
been looked upon by the courts as a most valuable asset that is especially
worthy of protection, particularly in a situation, such as the one here,
where an agent is servicing customers away from the principal's place of
business and builds up personal relationships that bind the customer to
him instead of the principal. See Borden v. Huey, 261 Ark. 313, 547 S.W.2d
760 (1977); Girard v. Rebsamen Ins. Co., supra. The customer lists
provided to Statco by SWBW contained not only the names of thousands of
customers, but valuable information regarding those customers, including
the customer's contract expiration date. This is not the type of
information that could be readily ascertained in another manner, such as
by looking in the telephone directory. See Jaraki v. Cardiology Assocs.,
supra at 205. Such information would allow a competitor or a former agent
to contact the customer at a time when the customer was vulnerable to
changing his service provider.
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Statco makes much of the fact that it, not SWBW, developed the
customer list and developed relationships with the customers through its
own efforts. However, it must be remembered that Statco was acting as
SWBW's agent, not on its own behalf. The agency contract recognizes that,
when a subscriber is enrolled for services, the subscriber becomes a
customer of SWBW.
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We likewise agree with the trial court that SWBW had a protectible
interest in the information contained in its agent compensation plans and
bid proposals, although we recognize that its interest in those items is
not as strong or as apparent as its interest in the customer list. The
agent compensation plans detailed the particular manner of an agent's
compensation for various services and features sold. According to SWBW
witness testimony, companies in the cellular industry do not usually know
how their competitors' agents are compensated. The witnesses also
testified that a competitor who viewed SWBW's agent compensation plans
could gain considerable insight into SWBW's pricing strategies and that
the competitor could discern what products and services were being
emphasized, based on incentives given for the sale of those
items.
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Bid proposals were the written proposals formulated when Statco would
compete with other CRS providers for corporate customers. In doing so, it
would submit the proposals to SWBW for special rates, discounts, or
features for the customer. SWBW would then reply, on that proposal sheet,
regarding whether or not such a bid would be accepted. According to a SWBW
witness, the information on some of these proposals would be considered
confidential because competitors could learn how low SWBW could go on its
rates and possibly discern SWBW's average revenue per unit (ARPU) figure.
Further, the bid proposals could give a competitor insight into the manner
that the company deals with corporate customers.
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Based on the above, we agree with the trial court that SWBW had a
protectible interest in the items discussed, in particular the customer
lists. *fn1 However, Statco argues that the confidential value to
SWBW of the above-mentioned items is belied by SWBW's actions in dealing
with its other agents. In particular, Statco points out that (1) SWBW
allowed three of its former agents to sell a competitor's product within
one year of terminating their relationship with SWBW; (2) certain
confidential information in the hands of those agents was not retrieved by
SWBW upon termination of the relationship; and (3) SWBW had no formal
written procedures for retrieving such information from terminated agents
or for monitoring an agent's compliance with the covenant not to
compete.
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It is undisputed that three former SWBW agents terminated their
relationship with SWBW and, when they began selling for one of SWBW's
competitors, they were not enjoined by SWBW from doing so. Two of the
agents were operating under contracts with AT&T;that were entered into
before AT&T;was acquired by SWBW. The AT&T;contract had a covenant
not to compete. The third agent was operating under a "McCaw" contract (a
company acquired by AT&T;prior to 1997), and that contract had no
covenant not to compete.
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Statco cites no authority for its proposition that SWBW's failure to
be diligent in enforcing the covenant against two former agents or in
failing to monitor the retrieval of information from terminated agents
precludes SWBW from asserting a protectible interest in the above items;
nor have we found any such authority in our own research, although the
extent of measures taken by a company to guard its information is a factor
in determining whether a matter is a trade secret. See Conagra, Inc. v.
Tyson Foods, Inc., 342 Ark. 672, 30 S.W.3d 725 (2000). *fn2 In any event, the trial court found that SWBW
presented credible evidence that it took steps to protect the secrecy of
the information contained in the customer lists and other items, and we do
not think that finding is clearly erroneous. Agents were required to sign
confidentiality agreements and abide by a code of conduct; SWBW was very
careful about who it provided customer lists to; and it had a policy to
retrieve confidential information from terminated agents. Further, the
fact that certain agents were able to sell for a competitor did not
present the same kind of risk to SWBW as the defection of a major agent
like Statco. SWBW's minor lapses in enforcement in this case do not
necessarily preclude it from asserting a protectible interest in the items
at issue herein.
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Finally, Statco argues that SWBW could not show that Statco was able
to use the confidential information to gain an unfair competitive
advantage. They cite the testimony of former agents and of SWBW's own
witnesses that it would be possible for an agent to sell for a competitor
without disclosing confidential SWBW information. However, the fact that
such a thing would be possible does not necessarily prevent enforcement of
the covenant. The question is whether Statco would be able to use the
information obtained to gain an unfair competitive advantage. See
Bendinger v. Marshalltown Trowell Co., supra at 417, n. 3. The very nature
of the information at issue here, especially the customer lists, is such
that a former agent would be able to use it to draw customers away from
SWBW or assist a competitor in a manner that would be impossible had the
agent not had access to the confidential information.
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In light of the foregoing, we conclude that SWBW had a protectible
interest sufficient to warrant enforcement of the covenant and that the
requirements set forth in Duffner v. Alberty have been
satisfied.
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We turn now to Statco's argument that the covenant was overly broad.
The covenant reads in pertinent part as follows:
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AGENT [Statco] agrees that AGENT, its officers, directors, key
employees, principals, sub-AGENTS, any Affiliate or the person or persons
owning a controlling interest in AGENT or an Affiliate, shall during the
term of this Agreement and except as noted below, for a period of one (1)
year following the later of the expiration or termination of this
Agreement[:]
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(1) not directly or indirectly induce, influence or suggest to any
Subscriber of SWBW's CRS to purchase any other CMRS from another Reseller
or provider of CMRS in the Area;
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(2) not directly or indirectly influence or suggest to any Subscriber
of any other Authorized Service to purchase a competing service from any
other provider or Reseller of such competing service in the Area, whether
or not the competing service is technologically the same as the Authorized
Service in question;
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(3) not, under any circumstances or conditions whatsoever, directly or
indirectly, as an individual, partner, stockholder, director, officer,
employee, manager, AGENT or dealer or in any other relation or capacity
whatsoever engage in the sale or promotion of CMRS or any other Authorized
Service on behalf of any competing Reseller or provider of such service in
the Area[;]
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(4) not, directly or indirectly, allow any other person, firm, or
other entity to use the name, trade name, goodwill, or any other assets or
property of AGENT or SWBW in any manner in connection with such other
entity's sale of CMRS or any other Authorized Service on behalf of a
competing Reseller or provider of service in the Area, and AGENT
specifically agrees not to transfer, assign, authorize or consent to the
transfer of an AGENT telephone number to such a competing person, firm or
other entity upon the expiration or termination of this
Agreement.
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Notwithstanding any language to the contrary, the restrictive
covenants contained herein shall not operate so as to restrict AGENT from
the business of providing or selling Paging Services.
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The trial court determined that the covenant's geographic and time
restrictions were narrowly drawn and therefore reasonable. The court
further found:
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[SWBW] has invested its resources to enable its agency representatives
to foster a relationship so that the customer will rely on its
representative in making purchase decisions. Statco was intimately
involved in the process of establishing personal relationships and
soliciting customers. It is only fair that Statco be restrained from
taking advantage of its relationship with SWBW's customers, which were
built with SWBW's support, until SWBW has had the opportunity to foster
the same relationships with Statco's successors.
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We do not find the trial court's conclusion to be clearly erroneous
because, although the covenant is broadly drawn, it is not unreasonably
so. *fn3
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We begin our discussion of this issue by noting that the covenant was
part of an arms-length contract entered into between business entities.
The covenant was a conspicuous part of the contract, and the parties
agreed, by the terms of the contract, that:
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[T]hey have read this Agreement and understand and accept the terms,
conditions and covenants contained herein as being reasonably necessary to
maintain SWBW, high standards for CRS and other services, thereby to
protect and preserve the goodwill of SWBW's CRS, Services and its
Marks.
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The restraints imposed by a covenant not to compete must not be
broader than necessary to protect the covenantee's interests. See Girard
v. Rebsamen Ins.Co., supra. Also, the law will not enforce a contract that
merely prohibits ordinary competition. Federated Mut. Ins. Co. v. Bennett,
supra. If a covenant prohibits the covenantor from engaging in activities
which are unnecessary to protect the promise, the covenant is
unreasonable. See Easley v. Sky, Inc., 15 Ark. App. 64, 689 S.W.2d 356
(1985). The extent of restraint in a covenant is critical in determining
its reasonableness. Restatement (Second) of Contracts § 188, comment d
(1981). The test to be employed is whether the restraint is reasonable as
between the parties and not injurious to the public by reason of its
effect upon trade. Whether or not the restraint is reasonable is to be
determined by considering whether it is such as to only afford a fair
protection to the interest of the party in whose favor it is given and not
so large as to interfere with the interests of the public. Girard v.
Rebsamen Ins. Co., supra at 159.
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Statco argues that the covenant is too broad because it applies not
only to Statco's owners, officers, and directors, but also to "key
employees," a term that is not defined in the contract. It further
contends that the covenant does not merely prevent solicitation of SWBW
customers but prohibits Statco from directing any potential customer to
another service provider. Additionally, Statco claims, the covenant
precludes Statco personnel, even as stockholders, from engaging in the
sale or promotion of a competitor's service. Moreover, Statco contends
that the fourth clause of the covenant would prohibit it from transferring
its telephone number or subleasing its premises to a
competitor.
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We interpret the covenant as being aimed at protecting three SWBW
interests: (1) keeping its customers from being appropriated by a former
agent; (2) keeping the confidential information possessed by its agent
from falling into the hands of a competitor; and (3) protecting its name,
goodwill, and assets. Our supreme court has recognized that covenants not
to compete are a legitimate means of protecting a principal's desire that
a former employee not appropriate its customers. See Borden v. Huey,
supra; Girard v. Rebsamen Insurance Co., supra. We conclude that the
particular restraints objected to by Statco in this case reasonably serve
that objective and the objective of preventing a competitor from acquiring
confidential information.
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Although the term "key employee" has no established definition, it is
more restrictive than the term "employee" and indicates a reasonable
desire to restrain only important Statco personnel who possess key
information from competing with SWBW. As for the fact that the covenant
restricts Statco from directing potential customers to a competitor or
from promoting a competitor's product as a stockholder, these restrictions
legitimately restrain Statco from serving the interests of SWBW's
competitors, which could lead to the sharing of confidential information
with those competitors. Likewise, SWBW would have an understandable desire
that its agent's telephone number and place of business not become a means
by which its customers could inadvertently fall into the lap of a
competitor.
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When these premises are considered, we disagree with Statco that the
terms of the covenant are overly broad. We also note that, even though the
one-year time restraint is not challenged on appeal, the fact that the
covenant's restraints apply only for a one-year period buttresses our view
that the covenant is not unreasonable in its scope.
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Statco further argues that there were other less restrictive means
that SWBW could have employed to protect its interests. It points out that
the agency contract contained restrictions on Statco's activities, such as
a restriction against divulging customer lists and a mandate to return
SWBW marketing materials upon termination of the contract. Further, Statco
argues that SWBW could simply have included a non- diversion clause in the
contract, prohibiting Statco from diverting SWBW customers following
termination.
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Statco's argument would apply to invalidate virtually every covenant
not to compete and, as we have already pointed out, such covenants may be
enforceable. A reasonably drawn covenant not to compete is an effective
means by which a principal may protect its customers and its confidential
information from appropriation and use by former agents or competitors.
While the alternative methods suggested by Statco could be of some use,
they do not substitute for a temporary ban on competitive activity, which
assures the principal that its interests will not be compromised. We
therefore affirm the trial court's finding that the covenant in this case
was reasonably drawn.
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Next, Statco argues that, because the right to use SWBW marks was a
consideration for it signing the covenant not to compete, that
consideration failed when SWBW began to market its product under the name
"Cingular." We disagree. First, the trial judge made no ruling regarding
consideration. Even if a matter is pled, we will not address it if it was
not brought to the trial judge's attention for a ruling. Britton v. Floyd,
293 Ark. 397, 738 S.W.2d 408 (1987). Second, as the covenant recites,
there was consideration for the covenant other than the use of the SWBW
marks. Third, SWBW did not begin using the Cingular name in public until
after Statco had sent the letter notifying SWBW that it would begin
selling competitive products.
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The final issue concerns the trial court's finding that Statco
misappropriated SWBW's trade secrets. A trade secret is information,
including a formula, pattern, compilation, program, device, method,
technique, or process that derives independent economic value, actual or
potential, from not being generally known to, and not being readily
ascertainable by, other persons who can obtain economic value from its
disclosure or use and is the subject of efforts that are reasonable under
the circumstances to maintain its secrecy. Ark. Code Ann. § 4-75- 601(4)
(Repl. 2001). Arkansas courts rely on six factors to determine whether
something is a trade secret: (1) the extent to which the information is
known outside the business; (2) the extent to which the information is
known by employees and others involved in the business; (3) the extent of
measures taken by plaintiff to guard the secrecy of the information; (4)
the value of the information to plaintiff and its competitors; (5) the
amount of effort or money expended by plaintiff in developing the
information; and (6) the ease or difficulty with which the information
could properly be acquired by others. See City Slickers, Inc. v. Douglas,
73 Ark. App. 64, 40 S.W.3d 805 (2001). To be entitled to injunctive
relief, actual or threatened misappropriation must be shown. Ark. Code
Ann. § 4-75-604 (Repl. 2001). Misappropriation means:
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(A) Acquisition of a trade secret of another person who knows or has
reason to know that the trade secret was acquired by improper means;
or
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(B) Disclosure or use of a trade secret of another without express or
implied consent by a person who:
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(i) Used improper means to acquire knowledge of the trade secret;
or
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(ii) At the time of disclosure or use, knew or had reason to know that
his knowledge of the trade secret was:
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(a) Derived from or through a person who had utilized improper means
to acquire it;
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(b) Acquired it under circumstances giving rise to a duty to maintain
secrecy or limit its use; or
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(c) Derived from or through a person who owed a duty to the person
seeking relief to maintain secrecy or limit its use; or
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(iii) Before a material change of his position, knew or had reason to
know that it was a trade secret and that knowledge of it had been acquired
by accident or mistake. Ark. Code Ann. § 4-75-601(2) (Repl.
2001).
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Even if the information acquired by Statco during the course of its
agency qualifies as a trade secret, the record is bereft of any evidence
that Statco has, or has threatened to, improperly misappropriate a trade
secret. Nevertheless, an injunction may issue if there is evidence that an
inevitable misappropriation will occur. See Cardinal Freight Carriers,
Inc. v. J.B. Hunt Transp. Servs., Inc., 336 Ark. 143, 987 S.W.2d 642
(1999). We do not believe there is enough evidence in this case to support
a finding of inevitable misappropriation. Statco has given no indication
that it will disclose trade secrets, nor is there any evidence that it
must necessarily do so to conduct its business. As mentioned earlier,
there was testimony that a former agent could work for a competitor
without using confidential information regarding his former
principal.
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Based on the foregoing, we affirm the trial judge's finding that
Statco violated the covenant not to compete, and we reverse her finding
that Statco violated the trade secrets act. We also modify the third part
of the trial court's judgment to add the following phrase at the end of
the clause: "for a period of one year from March 1, 2001."
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Affirmed in part as modified; reversed in part.
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Stroud, C.J., and Pittman, Hart, and Bird, JJ., agree.
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Griffen, J., dissents in part.
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Wendell L. Griffen, Judge, dissenting. The majority decision stands in
direct conflict with our own case law. In the name of holding parties to
their agreements and based on disregard for both the purpose of the law of
unfair competition and economic reality, today's decision violates the
longstanding and justified principle that only where goodwill has been
transferred ancillary to the sale and purchase of a business, for valid
consideration, does a purchaser have a legitimate pecuniary interest in
protecting that goodwill from competition from a seller. However, even
when goodwill has been transferred, our case law requires that contracts
in partial restraint of trade, such as clearly involved in this instance,
are valid only to the extent reasonably necessary for the purchaser's
protection. See Duffner v. Alberty, 19 Ark. App. 137, 718 S.W.2d 111
(1986).
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| [64] |
Plainly, this case involves neither the sale and purchase of a
business nor the transfer of goodwill attendant to such a transaction. It
is nothing more than a dispute between an employer-principal Southwestern
Bell Wireless (SWBW) and its former agent STATCO Wireless (STATCO) about
whether the public will be allowed to choose competing cellular telephone
services in the Hot Springs and Little Rock areas through the former
agent. Beyond that, the record demonstrates that the non-competition
covenant before us was not necessary to protect the legitimate interest of
SWBW concerning its customer lists, contracts, and agent compensation
plans. Although I agree that the trial court erred in finding that STATCO
misappropriated trade secrets and agree that SWBW had no proprietary
interest in the marketing strategies bulletins, I perceive no material
difference between the facts of this case and those presented by our
decision in Duffner v. Alberty, supra, where we reached an entirely
different result. Therefore, I dissent from the decision to affirm any
part of the trial court's decision and judgment.
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| [65] |
Duffner involved a covenant not to compete in an employment agreement
between an orthopedic surgeon and the practice group with whom he
practiced after completing his residency in June 1984. Duffner moved to
Fort Smith, joined the well established orthopedic group headed by Dr. Joe
Paul Alberty and Dr. John Wideman, and signed a written agreement
containing a covenant that stated, should he desire to leave the group, he
would not practice within a radius of thirty miles of the group offices
for one year from the date of termination. Duffner practiced with the
group until late spring of 1985, when he joined another orthopedic clinic
located in the same building where his former associates maintained their
practice. As in this case, the chancellor in Duffner entered an order
enjoining Duffner for a period of one year from the date of the order. We
reversed that decision in the face of the chancellor's finding that the
appellees had a valid and enforceable right to protect their substantial
investment in their medical practice, and to protect their established
medical clientele. In doing so, Chief Judge Cracraft, writing the opinion
following this unanimous en banc decision, stated:
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| [66] |
Although contracts between individuals ought not to be entered into
lightly, all other considerations must give way where matters of public
policy are involved. From our review of all the facts and circumstances,
we are of the opinion that the contract provision prohibiting appellant
from practicing medicine within thirty miles of the City of Fort Smith
constitutes an undue interference with the interests of the public right
of availability of the orthopedic surgeon it prefers to use and that the
covenant's enforcement would result in an unreasonable restraint of
trade.
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| [67] |
Here the contract did not relate to the sale of a business and its
goodwill. The appellees' goodwill remained with them. The benefits which
the appellant obtained from the reputation and goodwill of his former
associates would be no greater than that of an employee in any other
established business. It is only in those instances where goodwill has,
for valid consideration, been transferred that the purchaser has a
legitimate pecuniary interest in protecting against its being drained by
competition from the seller. Nor were any trade secrets, formulas,
methods, or devices which gave appellant an advantage over the appellees
involved here. At the time he joined the association he had received his
training and skills elsewhere and brought them with him. There is nothing
in the record to indicate that he learned any trade secret or surgical
procedures from the appellees which were not readily available to other
orthopedic surgeons. To the contrary, the record reflects that while in
the association he performed some orthopedic surgical procedures which the
appellees did not perform.
|
| [68] |
Although the chancellor found that the appellant had access to
appellees' confidential patient files, there was no evidence that he
attempted to memorize them or use information from those files to entice
any of their former patients to become patients of his new association.
Although there was evidence that he obtained the files on twenty-eight
persons from the appellees, it was explained that these were not new
patients but those who were receiving follow-up medical attention after
having undergone surgery by the appellant during his association with the
appellees. Other than those twenty-eight persons receiving post-operative
care, he testified that he had not seen more than two of appellees' former
patients.
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| [69] |
We cannot conclude from the evidence that appellant maintained a
personal relationship or acquaintance with appellees' patients or that
their "stock of patients" was appropriated by the appellant when he left
their offices.... We conclude that the enforcement of this covenant would
do no more than prohibit ordinary competition. Id. at 141-42, 718 S.W.2d
at 113-14. (Emphasis added.)
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| [70] |
Contracts in partial restraint of trade, where ancillary to a sale of
a business or profession with its goodwill, are valid to the extent
reasonably necessary to the purchaser's protection, and are looked upon
with greater favor than such an agreement ancillary to an employer-
employee or professional association relationship. Madison Bank &
Trust v. First Nat'l Bank, 276 Ark. 405, 635 S.W.2d 268 (1982); Marshall
v. Irby, 203 Ark. 795, 158 S.W.2d 693 (1942); Easley v. Sky, Inc., 15 Ark.
App. 64, 689 S.W.2d 356 (1985). Where the covenant grows out of an
employment or other associational relationship, our appellate courts have
found an interest sufficient to warrant enforcement of the covenant only
in those cases where the covenantee provided special training, or made
available trade secrets, confidential business information or customer
lists, and then only if it is found that the associate was able to use
information so obtained to gain an unfair competitive advantage. See Orkin
Exterminating Co. v. Weaver, 257 Ark. 926, 521 S.W.2d 69 (1975);
Rector-Phillips-Morse, Inc. v. Vroman, 253 Ark. 750, 489 S.W.2d 1 (1973);
All-State Supply, Inc. v. Fisher, 252 Ark. 962, 483 S.W.2d 210 (1972);
Girard v. Rebsamen Ins. Co., 14 Ark. App. 154, 685 S.W.2d 526 (1985). The
validity of these covenants depends upon the facts and circumstances of
each particular case. Evans Laboratories, Inc. v. Melder, 262 Ark. 868,
562 S.W.2d 62 (1978). The general rule is that a contract in restraint of
trade ancillary to a sale or a business transaction, which is reasonably
limited as to time and place, is not against public policy and is not
invalid. Madison Bank & Trust v. First Nat'l Bank, supra; see also
Bloom v. Home Ins. Agency, 91 Ark. 367, 121 S.W. 293 (1909); Webster v.
Williams, 62 Ark. 101, 34 S.W. 537 (1896); United States v. Empire Gas
Corp., 537 F.2d 296 (8th Cir. 1976), cert. den. 429 U.S. 1122 (1976); 17A
C.J.S. Contracts § 249 (1999); 54A Am. Jur. 2d Monopolies, Etc., 853
(1996).
|
| [71] |
The courts view a restraint of trade agreement ancillary to the
transfer of a business with greater liberality, being "more prone to
uphold restrictive clauses" than employer/employee covenants. Madison Bank
& Trust v. First Nat'l Bank, 276 Ark. at 409, 635 S.W.2d at 270; see
also McLeod v. Meyer, 237 Ark. 173, 372 S.W.2d 220 (1963); 42 Am. Jur. 2d
Injunctions § 141 (2000); and 54A Am.Jur.2d Monopolies, Etc. § 853 (1996).
In Little Rock Towel & Linen Supply Co. v. Independent Linen Service
Co., our supreme court said, "Owing to the possibility that a person may
be deprived of his livelihood the courts are less disposed to uphold
restraints in contracts of employment than to uphold them in contracts of
sale." 237 Ark. 877, 879, 477 S.W.2d 34, 36 (1964). Whether a restraint
provision is reasonable or unreasonable is a question to be determined
under the facts of each case. McLeod v. Meyer, supra. The trial court's
findings will not be reversed unless clearly erroneous. Ford Motor Credit
Co. v. Yarbrough, 266 Ark. 457, 587 S.W.2d 68 (1979); Ark. R. Civ. P. Rule
52(a).
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| [72] |
The non-competition covenants before us plainly do not arise from the
sale of an established business or profession. There is no proof that SWBW
sold its cellular phone service business to STATCO. No evidence supports a
conclusion that SWBW would be deprived of its livelihood unless the
non-competition covenant in these agreements is upheld. Thus, the more
liberal standard applicable to agreements which restrain trade ancillary
to the transfer of a business has no application to this
case.
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| [73] |
While it is true that the party challenging the validity of a non-
competition covenant arising from an employment or associational
relationship has the burden of proving that the arrangement violates
public policy, that burden of proof does not weaken the threshold
principle that such arrangements are not favored under the law and that
even if created to protect legitimate business interests, it must be shown
that the person restrained by the covenant was able to use information
obtained by the employment or associational relationship to gain an unfair
competitive advantage. Orkin Exterminating Co. v. Weaver, supra. The law
does not prohibit a former associate or employee from altogether competing
against an employer or principal, but merely prohibits the use of
confidential information gained from the former employer or principal to
attain an unfair competitive advantage.
|
| [74] |
By relying on the non-competition covenant, SWBW seeks to blur, if not
altogether erase, the rather fundamental distinction in our restraint of
trade jurisprudence between non-competition covenants attendant to the
sale of a business and such covenants contained in employment or
associational agreements such as the one it had with STATCO. Yet, that
distinction is both plain and sound. Someone purchasing a going concern
and its goodwill should not be vulnerable to the obvious competitive
disadvantage of competing with the seller for the goodwill and patronage
of the seller's former customers. On the other hand, someone who merely
contracts to work for another person should not be restrained from
offering his services to other contractors after leaving a former
associational or employment relationship unless there is no other less
restrictive remedy available to protect the former employer from unfair
competition. In this case, SWBW not only failed to immediately seek return
of the information it deemed proprietary-even to the date it filed suit to
enforce the non- competition covenant-but produced no proof that STATCO's
continued presence as a seller of competing cellular phone service posed
the risk of unfair competition.
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| [75] |
A glaring example, but by no means the only one, that proves that the
anti-competitive effect of the non-competition covenant went far beyond
anything needed to protect the customer list, agent compensation plan, and
contract bid documents from exploitation is found in sub- paragraph 4 of
Paragraph 18, the paragraph containing the non- competition covenant. At
sub-paragraph 4, the agreement provides that STATCO will
|
| [76] |
not, directly or indirectly, allow any other person, firm, or other
entity to use the name, trade name, goodwill, or any other assets or
property of AGENT ... any manner in connection with such other entity's
sale of [cellular phone service] or any other Authorized Service on behalf
of a competing Reseller or provider of service in the Area, and AGENT
specifically agrees not to transfer, assign, authorize or consent to the
transfer or an AGENT telephone number to such a competing person, firm or
other entity upon the expiration or termination of this
Agreement.
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| [77] |
There was no proof that SWBW had any proprietary interest in STATCO's
phone number, office lease, or trade name. There was no proof that SWBW
had any interest in whether anyone besides STATCO engaged in the "sale of
[cellular phone service] ... on behalf of a competing Reseller or provider
of service in the Area," aside from hindering customers from the chance to
obtain cellular phone service from SWBW competitors. The notion that SWBW
needed to prevent STATCO from leasing its office space to one of its six
competitors (Alltel, Sprint, Cricket, Nextel, CenturyTel, and SunCom) in
order to protect the proprietary nature of the customer lists, agent
compensation plans, and contract bid proposals is patently absurd. By
affirming the trial court's decision enforcing the non-competition
covenant in the face of this absurdity, the majority defies the
longstanding principle that even when non-competition covenants arise out
of the sale of a business with its goodwill, they are enforced only if
necessary to protect the purchaser from unfair competition.
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| [78] |
It is certainly true that STATCO agreed to the non-competition
covenant that SWBW placed in the exclusive agency agreements. However,
that fact has never been controlling or directed our understanding of the
legal principles applied to cases involving the enforceability of
non-competition covenants. No matter what parties write into their
agreements, the public has the right to free and open markets for goods
and services. This right, not the wording of non-competition covenants, is
the fundamental principle before which all contracts must yield if the
notion of free enterprise is to be anything but a fiction. In this case,
that means the public has the right to select cellular phone service from
whomever can make that service available. The non- competition covenant
upheld today restrains the public's exercise of that right by restricting
access to competing cellular phone service in the same geographic market
with SWBW.
|
| [79] |
The proprietary information contained in the SWBW customer lists,
agent compensation plans, and bid proposals falls far short of the kind of
sensitive and personal information exchanged between patients and their
physicians. Even so, we reversed the injunction in Duffner. Here, as in
Duffner, the non-competition covenant did not arise out of the sale of a
business and transfer of goodwill. As in that case, the record before us
does not show that STATCO made any attempt to retain or exploit any of the
proprietary information to "entice" any SWBW customers to convert their
cellular phone service to a SWBW competitor.
|
| [80] |
I am unimpressed by the argument that our decision in Duffner resulted
because we found something peculiar about the practice of orthopedic
medicine such that our holding in that case should not apply to a case
involving the availability of cellular telephone service. Duffner, we are
told according to that argument , is not controlling on this case because
there is a legally material distinction, insofar as the law of unfair
competition and restraint of trade is concerned, between practicing
orthopedic medicine (a professional calling) and marketing cellular
telephone service. We should not read Duffner or the rest of our case law
in this area in such simplistic terms.
|
| [81] |
In fact, a survey of our decisions dealing with challenges to non-
competition covenants quickly disproves the notion that the law makes such
a distinction between professional undertakings and other commercial or
business pursuits. In Rector-Phillips-Morse v. Vroman, supra, our supreme
court affirmed a trial court's decision to deny an injunction to enforce a
three-year non-competition covenant between a real estate agency and one
of its former salesmen because the three-year restriction was not
reasonably necessary to protect the realtor from unfair competition. In
Orkin Exterminator Co. v. Weaver, 257 Ark. 926, 521 S.W.2d 69 (1975), the
supreme court similarly affirmed a trial court's denial of an injunction
to enforce a two-year non-competition covenant between a pest control
company and a former employee who re- entered the pest control business in
partnership with another former employee within a week after being
discharged. Justice George Rose Smith's analysis of the proof in that case
is both instructive as well as dispositive of the view that the law should
somehow protect certain employers from what amounts to ordinary, as
contrasted to unfair, competition. Justice Smith wrote:
|
| [82] |
The basic flaw in Orkin's position is that its contract, according to
its own proof, is directed not against unfair competition but against
competition of any kind on the part of its former employees. ....If
Orkin's position is sound, then any employer in any business devoted to
selling - whether the sales be of insurance, real estate, clothing,
groceries, hardware, or anything else - can validly prohibit its former
salesmen from engaging in that business within the vicinity for as long as
two years after the termination of employment. Needless to say, the law
does not provide any such protection from ordinary competition. Id. at
929-930, 521 S.W.2d at 71. (Citations omitted.)
|
| [83] |
Our decision in Duffner, like the decisions by our supreme court and
other case law dealing with unfair competition and covenants not to
compete, does not turn on the peculiarities of a given business,
profession, trade, or craft. Our law dealing with non-competition
covenants is based on whether such a covenant in whatever enterprise
amounts to an unfair restraint on ordinary competition. In Duffner, Chief
Judge Cracraft concluded the opinion by observing "that the enforcement of
this covenant would do no more than prohibit ordinary competition." 19
Ark. App. at 142, 718 S.W.2d at 114. That inquiry is valid no matter what
the enterprise may be that is subject to the non- competition
covenant.
|
| [84] |
I am equally unpersuaded by the majority view that STATCO's position
would invalidate every covenant not to compete. The law does not guarantee
anyone a right to be free from ordinary competition. Nor does the law
justify "a temporary ban on competitive activity, which assures the
principal that its interests will not be compromised" where goodwill has
not been transferred ancillary to the purchase and sale of a business.
That principle was clearly controlling in our Duffner decision. The
majority does not explain why it does not govern this case, let alone
justify departing from it.
|
| [85] |
For the reasons stated by Chief Judge Cracraft, the holding in Duffner
should apply to the facts and dictate the outcome of this case. There is
nothing wrong with ordinary competition and nothing unfair about having to
engage in ordinary competition against former business associates for the
patronage of valued customers. No matter what parties write into their
employment agreements, public policy holds that there is something
fundamentally wrong about denying people freedom to choose where they want
to do business by preventing them access to outlets where competitors can
operate. That is why non-competition covenants are disfavored by our
law.
|
| [86] |
I dissent.
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Opinion Footnotes |
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|
| [87] |
*fn1 As for SWBW's marketing strategies, these were
contained in marketing bulletins sent by SWBW to its agents. The bulletins
communicated SWBW's upcoming promotions as well as strategies for dealing
with competitors' promotions. SWBW acknowledged that much of the
information contained in the bulletins could be discovered by competitors
through "shopping," i.e., calling and pretending to be a customer and that
much of the information would lose its confidential status over the
passage of time, for example in the case of bulletins that announced
upcoming promotions. We agree with Statco that SWBW had no protectible
interest in the marketing bulletins but, given our holding that a
protectible interest existed in the customer lists, compensation plans,
and bid proposals, the operative provisions of the trial court's judgment
are not affected.
|
| [88] |
*fn2 But see Rector-Phillips-Morse v. Vroman, 253 Ark. 750,
489 S.W.2d 1 (1973), where the court discounted the confidential nature of
certain information when twenty-three of thirty-one former RPM salesmen
would have been permitted to compete with RPM and use the information.
However, that scenario is far beyond the scope of what occurred
here.
|
| [89] |
*fn3 Statco points out that the trial court did not
specifically rule on whether certain particular provisions of the covenant
rendered it unreasonably broad. Were we to fully agree with that
characterization of the court's findings, we would decline to address the
issue. It is the appellant's burden to obtain a ruling from the trial
court and, in the absence of such a ruling, we do not reach the issue
involved. See Kangas v. Neely, 346 Ark. 334, 57 S.W.3d 694 (2001).
However, our reading of the overall findings and conclusions by the trial
judge convinces us that she considered the covenant reasonable in all
respects. Thus, we will reach the merits of this
point.
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