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Court of Appeals of Arkansas Division II
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No. CA 91-236
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36 Ark. App. 99, 818
S.W.2d 596, 1991.AR.0042975< http://www.versuslaw.com>
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November 13, 1991
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FEDERATED MUTUAL INSURANCE COMPANY AND FEDERATED LIFE INSURANCE
COMPANY
V.
BILLY EUGENE "GENE" BENNETT, JR.
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SYLLABUS BY THE COURT
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1. COVENANTS - COVENANTS NOT TO COMPETE ARE NOT FAVORED. - Covenants
not to compete are not favored by the law and must meet three requirements
before they will be enforced: (1) the covenantee must have a valid
interest to protect; (2) the geographical restriction must not be overly
broad; and (3) a reasonable time limit must be imposed.
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2. COVENANTS - COVENANTS NOT TO COMPETE - COVENANTEE MUST HAVE
LEGITIMATE INTEREST TO BE PROTECTED. - Covenants not to compete will not
be enforced unless a covenantee had a legitimate interest to be protected
by such an agreement, and the law will not enforce a contract merely to
prohibit ordinary competition.
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3. CONTRACTS - CONTRACTS IN RESTRAINT OF TRADE - REASONABLENESS. - The
test of reasonableness of contracts in restraint of trade is that the
restraint imposed upon one party must not be greater than is reasonably
necessary for the protection of the other and not so great as to injure a
public interest.
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4. COVENANTS - COVENANTS NOT TO COMPETE - CASE BY CASE DETERMINATION
OF VALIDITY. - The validity of covenants not to compete depends upon the
facts and circumstances of each particular case.
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5. COVENANTS - COVENANT NOT TO COMPETE - OVERBROAD COVENANT VOID. -
Appellee was not unfairly competing with appellants and the covenant not
to compete was overbroad and thus void where the clause was broad enough
to encompass appellee's sales of insurance to former clients that they
could not obtain from appellants when he refused to sell any policy that
replaced one of appellants' policies.
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6. EVIDENCE - EXCLUSION OF EVIDENCE ON UNPLED ISSUES UPHELD. - Where
the sole issue was whether the covenant not to compete was enforceable,
the chancellor correctly excluded evidence of a violation of other clauses
in the contract.
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7. COVENANTS - COVENANTS NOT TO COMPETE - MODIFICATION BY COURT. -
When a covenant not to compete is too far-reaching |
[36 ArkApp Page 100] to
be valid, the court will not make a new contract for the
parties.
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Appeal from Washington Chancery Court; John Lineberger, Chancellor;
affirmed.
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Davis, Cox & Wright, by: Wm. Jackson Butt II, and Tim E. Howell,
for appellants.
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Estes, Estes, & Gramling, by: Peter G. Estes, Jr., for
appellee.
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The opinion of the court was delivered by: Elizabeth W. Danielson,
Judge.
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Federated Mutual Insurance Company and Federated Life Insurance
Company appeal from the Washington County Chancery Court's refusal to
enforce a covenant not to compete against appellee, Billy Eugene Bennett,
Jr., appellants' former employee. Appellants contend that the covenant
should have been enforced; that the chancellor erred in refusing to admit
certain evidence; and that the chancellor erred in refusing to apply the
employment contract's severability clause. We disagree and
affirm.
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Appellee went to work as a marketing representative, or agent, for
appellants in December of 1980, with an assigned territory which included
several counties in northwestern Arkansas. Appellee was appellants' only
marketing representative assigned to this territory and could not sell
insurance for any other company. In 1983, the parties signed an employment
contract, which included the following provision:
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5. Marketing Representative agrees that he will not, within a period
of two years following the date of the voluntary or involuntary
termination of his employment with Employer, or his retirement therefrom,
either directly or indirectly, by and for himself, or as the agent of
another, or through others as his agent:
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(a) Divulge the names of Employer's policyholders and accounts to any
other person, firm or corporation if these accounts are located within the
territory assigned from time to time;
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(b) In any way seek to induce, bring about, promote, facilitate or
encourage the discontinuance of or in any way solicit for and in behalf of
himself or others, or in any way |
[36 ArkApp Page 101]
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quote rates, accept, receive, write, bind, broker or transfer any
renewal or replacement of any of the insurance business, policies, risks
or accounts written, issued, covered, obtained (whether through the
efforts of Marketing Representative or not) or carried by Employer in the
territory assigned to Marketing Representative under this Employment
Contract; nor will the Marketing Representative accept, receive, obtain,
write, place, bind or broker insurance business or insurance policies of
any type for any of Employer's policyholders and customers in said
territory assigned within the said two year period.
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In May 1990, appellee notified appellants that he had decided to
resign at the end of that month. After terminating his employment with
appellants, appellee began selling insurance for the Fulmer Insurance
Agency. In October 1990, appellants filed suit against appellee, seeking
specific performance of the covenant not to compete. In his answer,
appellee asserted that the covenant not to compete was unreasonable and
against public policy and, therefore, unenforceable.
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[1-4] Covenants not to compete are not looked upon with favor by the
law. Duffner v. Alberty, 19 Ark. App. 137, 139, 718 S.W.2d 111, 112
(1986). In order for such a covenant to be enforceable, three requirements
must be met: (1) the covenantee must have a valid interest to protect; (2)
the geographical restriction must not be overly broad; and (3) a
reasonable time limit must be imposed. Id.; Rebsamen Ins. v. Milton, 269
Ark. 737, 743, 600 S.W.2d 441, 443-44 (Ark. App. 1980). Here, it is not
argued that the geographic restriction was overbroad or that the time
limitation was unreasonable. Appellee successfully asserted at trial that
appellants had no valid interest in preventing him from selling lines of
insurance not offered by appellants. Covenants not to compete will not be
enforced unless a covenantee had a legitimate interest to be protected by
such an agreement, and the law will not enforce a contract merely to
prohibit ordinary competition. Duffner v. Alberty, 19 Ark. App. at 139,
718 S.W.2d at 112; Import Motors. Inc. v. Luker, 268 Ark. 1045, 1051, 599
S.W.2d 398, 401 (Ark. App. 1980). The test of reasonableness of contracts
in restraint of trade is that the restraint imposed upon one party must
not be greater than is reasonably necessary for the protection |
[36 ArkApp Page 102]
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of the other and not so great as to injure a public interest. Duffner
v. Alberty, 19 Ark. App. at 139, 718 S.W.2d at 112. Accord Evans Labs.,
Inc. v. Melder, 262 Ark. 868, 871, 562 S.W.2d 62, 64 (1978); Girard v.
Rebsamen Ins. Co., 14 Ark. App. 154, 159, 685 S.W.2d 526, 528 (1985). As
we stated in Duffner v. Alberty, 19 Ark. App. at 141, 718 S.W.2d at 113,
"[a]lthough contracts between individuals ought not to be entered into
lightly, all other considerations must give way where matters of public
policy are involved." The validity of these covenants depends upon the
facts and circumstances of each particular case. Duffner v. Alberty, 19
Ark. App. at 140, 718 S.W.2d at 113. Accord Miller v. Fairfield Bay Inc.,
247 Ark. 565, 569, 446 S.W.2d 660, 663 (1969); Rebsamen Ins. v. Milton,
269 Ark. at 742, 600 S.W.2d at 443.
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Where a covenant not to compete grows out of an employment
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 information so obtained to gain an unfair
competitive advantage. Duffner v. Alberty, 19 Ark. App. at 139-40, 718
S.W.2d at 112.
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[5] At trial, evidence was introduced that, after appellee began
employment with the Fulmer Agency, he provided some insurance policies to
several of his former customers but only sold them types of insurance that
they could not obtain from appellants; appellee did not sell any policy
that replaced one of appellants' policies. Appellants also did not lose
any profits as a result of appellee's employment with the Fulmer
Agency.
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Billy Roses, appellants' district marketing manager for Arkansas and
Louisiana, testified that, after marketing representatives are hired, they
are sent to Owatonna, Minnesota, for three weeks' training. After they
return, he assists them in their offices for four days. Then, for a
seven-month period, his practice is to provide two to three days of
on-site supervision every other week. After four months, appellants send
the marketing representatives to Atlanta for seminars and, at the end of a
year, to Owatonna for an additional seminar. Periodically, each marketing
representative comes into the district office for further |
[36 ArkApp Page 103]
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training. Mr. Roses also testified that it takes approximately one and
a half to two and a half years to fully train a new agent.
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Mr. Roses stated that the clients' only contact with the company is
through the agent at the customers' places of business. He provided a list
of forty-eight commercial accounts in appellee's territory as of the day
appellee left and testified that information about these accounts was
available to appellee. This information included "[e]verything that
pertains to the insurance they have and all the coverages they have."
There is no evidence, however, that appellee utilized such information to
entice away any of appellants' clients.
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Mr. Roses testified that having a personal relationship with clients
and having already sold them some kind of insurance is helpful in selling
them additional types of insurance. He stated that appellants had no
objection to appellee's soliciting business of any kind with anyone not on
the list but did want to prevent him from selling any type of insurance to
the customers listed thereon. He stated: "Well, Mr. Bennett is a sales
person and, obviously, got to know these people very well and he's got his
foot in the door and as a sales person, I can't control what he says to
those insureds pertaining to the business that we have on the
books."
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Appellee admitted that he has sold some insurance to several of
appellants' clients but testified that appellants did not make these
policies available to these clients. He also stated that he has written
some collateral protection policies to the customers of Williams Ford
Tractor, with the lending institutions listed as the named insureds. He
stated that, at one time, appellants sold a few collateral protection
policies to customers of Williams Ford Tractor but that the insureds
listed on those policies were Williams Ford and its customers. Appellee
also testified that another client of appellants, Stanley Greenwood, asked
to buy some life insurance from appellee but appellee refused to sell it
because Mr. Greenwood had already bought a policy from Federated Life
Insurance.
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At the end of the trial, the chancellor stated:
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I don't see any problems with the geographical area. As I see it,
though, there is one other major difference in the matter here. Mr. Roses
says, "Judge, we not only are |
[36 ArkApp Page 104]
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interested in seeing that Mr. Bennett doesn't compete with us for
business we are writing now, but we don't want him competing with us for
the same companies or business that we're not writing now." That clause is
big enough to include it. . . . But by being big enough to include that,
the Court finds that that in itself makes the clause unreasonable. Because
. . . there is no evidence in this case that Mr. Bennett is competing
directly with Federated Insurance Company for any business that Federated
is now selling. . . . Federated is wanting to stop him from writing any
other insurance.
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The chancellor concluded that appellee was not exercising unfair
competition in selling a product that appellants did not sell and found
the covenant not to compete to be overly broad and void. We
agree.
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[6] For their second point on appeal, appellants argue that the
chancellor erred in refusing to admit evidence of appellee's actions prior
to leaving appellants. Appellants attempted to introduce testimony and
documentary evidence of appellee's failure to follow appellants' policy
concerning the referral of business by its marketing representatives and
proffered evidence that appellee referred business to the Fulmer Agency
while still employed by appellants. The chancellor found the evidence to
be outside the pleadings and sustained appellee's objection. The
chancellor said that the sole issue before the court was whether the
covenant not to compete was enforceable and not whether appellee had
violated some other clause in the contract. We agree and cannot say that
the chancellor erred in refusing to admit this evidence.
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[7] In their third point on appeal, appellants argue that the
chancellor erred in refusing to apply the severability clause of the
contract. They assert that the chancellor should have severed the
offending language of the covenant not to compete, thereby allowing this
provision to remain valid as to lines of insurance actually offered by
appellants. Simply striking the offending language of the covenant not to
compete, however, would not suffice. In order to accomplish appellants'
purpose, it would be necessary to rewrite the covenant not to compete, and
this we will not do. It has long been the rule that, when a covenant not
to |
[36 ArkApp Page 105]
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compete is too far-reaching to be valid, we will not make a new
contract for the parties. Rector-Phillips-Morse. Inc. v. Vroman, 253 Ark.
750, 753, 489 S.W.2d 1, 4 (1973).
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Affirmed.
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CRACRAFT, C.J., and MAYFIELD, J., agree.
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