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HomeMy WebLinkAbout01-6500 EQUITYMASON-NORTON COMPANY, INC., Plaintiff Vo SCOTT W. THUMMA, Defendant IN THE COURT OF COMMON PLEAS OF CUMBERLAND COUNTY, PENNSYLVANIA CIVIL ACTION - EQUITY NO. 01-6500 EQUITY TERM IN RE: PLAINTIFF'S MOTION FOR PRELIMINARY INJUNCTION BEFORE OLER, J. OPINION and PRELIMINARY INJUNCTION OLER, J., January 11, 2002. This equity case arises out of an alleged breach by an employee of a covenant not to compete incident to his employment. For disposition at this time is a motion for a preliminary injunction filed by the employer, seeking preliminary enforcement of the covenant. A hearing on the motion was held on December 27, 2001. For the reasons stated in this Opinion, the motion for a preliminary injunction will be granted. STATEMENT OF FACTS The evidence presented at the hearing on Plaintiff's motion demonstrated the probability that Plaintiff will be able to establish the following facts at trial: Plaintiff is Mason-Norton Company, Inc., an "S" corporation solely owned by George O. Preble, its president, and having its principal place of business at 310 South Tenth Street, Lemoyne, Cumberland County, Pennsylvania. Defendant is Scott W. Thumma, an adult individual residing at 509 Fifth Street, New Cumberland, Cumberland County, Pennsylvania. Plaintiff is in the business of selling commercial building products (e.g., windows, partitions and bathroom accessories) to contractors. The contractors, in mm, utilize the products in their construction projects. Plaintiff's sales to the contractors are generally on the basis of competitive bidding against other companies in the same business. Prior to 1992, the Mason-Norton Company was a parmership comprised of George O. Preble and his father, Herbert N. Preble; it became a sole proprietorship, owned and operated by George O. Preble, in 1992, and an "S" corporation, owned and operated by him, in 1998. Defendant joined the company as a salesperson on October 11, 1984.~ Incident to his employment, he executed the following covenant not to compete: As a condition of my employment with Mason-Norton Company, I hereby agree that, if for any reason I must seek employment elsewhere, that for a period of 5 years following the termination of my employment with Mason-Norton Company, I will not work for any other company, individual or myself in competition with the Mason-Norton Company or Herbert N. Preble, throughout the Commonwealth of Pennsylvania) Defendant left his employment with the company in 1988, and for about a year was employed as a seller of computer business forms. On September 20, 1989, he was rehired by the company. Again, incident to his employment he executed the following covenant not to compete: As a condition of my employment with Mason-Norton Company, I hereby agree that, if for any reason I must seek employment elsewhere, that for a period of 5 years following the termination of my employment with Mason-Norton Company, I will not work for any other company, individual or myself in competition with the Mason-Norton Company or Herbert N. Preble, throughout the Commonwealth of Permsylvania.3 On May 31, 2001, Defendant voluntarily resigned from his position with Plaintiff as sales manager following an argument with its president, George O. Preble. An attempt by Mr. Preble to reestablish contact with Defendant after the argument was unsuccessful. ~ Plaintiff's Exhibit 1, Hearing, December 27, subsequently promoted to sales manager. : Plaintiff's Exhibit 2. Plaintiff's Exhibit 4. 2001 (hereinafter Plaintiff's Exhibit ~. He was 2 Since June 15, 2001, Defendant has been employed by a competitor of Plaintiff, Hostetter Supply Company, Inc., primarily as a sales person, at an annual salary of $55,000.00 plus a bonus. The principal place of business of Hostetter Supply Company, Inc., is in York, York County, Pennsylvania, about 15 miles in distance from Plaintiff' s principal place of business. The geographic area in which Plaintiff does business is primarily Pennsylvania and secondarily Maryland, New Jersey, New York, West Virginia and Delaware. The geographic area in which Defendant's present employer primarily does business is central Pennsylvania. According to testimony of Plaintiff's president, the average duration of Plaintiff's static relationship with contractors is five years. Plaintiff currently has sixteen employees, of whom only one is in sales. Its gross annual revenues total about $5,000,000.00. However, the net revenues of the company are modest.4 During his employment with Plaintiff, Defendant acquired special knowledge about Plaintiff's pricing structures and profit margins. The business in which Plaintiff and Defendant's present employer engage is highly specialized and highly competitive. The evidence supported the proposition that the restrictive covenant sub judice was appropriate to Plaintiff's reasonable business needs in terms of proscribed activity and geographic area, although the temporal extent of the restriction was, in the court's view, somewhat excessive. In the latter respect, however, the evidence more than supported the proposition that a period of at least a year was reasonable. DISCUSSION Statement oflarv. Several principles of law are of importance in the present context. First, with respect to preliminary injunctions, the standard has been stated as follows: 4 According to Plaintiff's president, "[s]ometimes the state makes more money in sales tax than we do." 3 Three criteria have been established for the granting of a preliminary injunction .... They are: (1) the preliminary injunction must be necessary to prevent immediate and irreparable harm which could not be compensated for by damages; (2) greater injury would result from the denial of the preliminary injunction than from the granting of it; and (3) it would operate to restore the parties to the status quo as it existed prior to the alleged wrongful conduct. In addition to meeting all three criteria, the court must be convinced that [plaintiff's] right to a preliminary injunction is clear.., and general equity jurisdiction must be warranted. Comm. of Seventy v. Albert, 33 Pa. Commw. 44, 49, 381 A.2d 188, 190 (1977). The "purpose [of a preliminary injunction] is to preserve the status quo.., by restoring the last peaceable, noncontested status which preceded the controversy." Soja v. Factotyville Sportsmen's Club, 361 Pa. Super. 473, 477, 522 A.2d 1129, 1131 (1987). Second, where a preliminary injunction is issued, it must, as a general rule, be subject to the plaintiff's filing of [a] bond in an amount fixed and with security approved by the court, naming the Commonwealth as obligee, conditioned that if the injunction is dissolved because improperly granted..., the plaintiff shall pay to any person injured all damages sutained by reason of granting the injunction and all legally taxable costs and fees, or [subject to the plaintiff's deposit].., with the prothonotary [of] legal tender of the United States in an amount fixed by the court to be held by the prothonotary upon the same condition as provided for the injunction bond. Pa. R.C.P. 153 l(b). Third, with respect to covenants not to compete, it has been noted by Judge Hess of this Court that [c]ourts of equity will enforce.., covenants [not to compete].., when they are (1) incident to an employment relationship between the employer and employee; (2) reasonably necessary for the protection of the employer; and (3) reasonably limited in duration and geographic extent. Sidco Paper Co. v. Aaron, 465 Pa. 586, 591, 351 A.2d 250, 4 257 (1976). When restrictive covenants meet this three-prong test, they are prima facie enforceable. Bettinger v. Carl Berke Associates, Inc., et al., 455 Pa. 100, 103, 314 A.2d 296, 298 (1974). Wood Co. v. Hickey, 40 Cumberland L.J. 511, 514 (1990) (preliminary injunction issued); see Pennsel Communication Servs., Inc. v. DiCosimo, No. 01-2643 Civil Term (C.P. Cumberland July 9, 2001) (preliminary injunction issued); Computer Res. Assocs., Inc. v. Musselman, No. 93-0008 Equity Term (C.P. Cumberland March 16, 1993) (preliminary injunction issued). As a general rule, a covenant not to compete incident to employment will survive a change in form of the employer's business entity from sole proprietorship to "S" corporation. See Seligman & Latz of Pittsburgh, Inc. v. Vernillo, 382 Pa. 161, 164, 114 A.2d 672, 673-74 (1955); Howe v. Anderson, 23 Pa. D. & C.3d 297, 301 (C.P. Adams 1982) Where unreasonableness of a covenant not to compete is an issue, the burden is upon the party asserting such unreasonableness to demonstrate it. John G. Bryant Co. v. Sling Testing and Repair, Inc., 471 Pa. 1, 12, 369 A.2d 1164, 1169 (1977) (issuance of preliminary injunction affirmed). Furthermore, an assessment of irreparable harm in the context of breach of a covenant not to compete is to be made with an understanding that "[i]t is not the initial breach of [the] covenant which necessarily establishes the existence of irreparable harm but rather the threat of the unbridled continuation of the violation and the resultant incalculable damage to the former employer's business." Id. at 7, 369 A.2d at 1167. "General covenants are reasonably limited if they are 'within such territory and during such time as may be reasonably necessary for the protection of the employer.., without imposing undue hardship on the employee.'" Jacobson & Co., Inc. v. In!'l Env '! Corp., 427 Pa. 439, 452, 235 A.2d 612, 620 (1967) (quoting Restatement of Contracts §516(f) (1932)). "What limits as to activity, geographical area, and time are appropriate in a particular case depends upon all 5 the circumstances." Restatement (Second) of Contracts § 188, cmt. d (1981). The reasonableness of the temporal and geographic aspects of a restrictive covenant must be determined in light of the nature of the employer's interest to be protected. N. Am. Publ. Co. v. Bishop, 15 Phila. 448, 455 (1987) (citing Boldt Mach. & Tools, Inc. v. Wallace, 469 Pa. 504, 366 A.2d 902 (1976)). With regard to the geographic aspect of a covenant not to compete, "[t]he principle of customer-contact protection finds its expression in the general rule that the territorial restraint in a covenant not to compete will, generally speaking, be considered reasonable if the area covered by the restraint is limited to the territory in which the employee was able, during the term of his employment, to establish contact with his employer's customers." C.T. Dreschsler, Annotation, Enforceability of Restrictive Covenant, Ancillary to Employment Contract, As AfJkcted by Territorial Extent of Restriction, 43 A.L.R.2d 94, 162 (1955). In appropriate circumstances, a covenant encompassing the area of an entire country may be upheld. See, e.g., Plunkett Chem. Co. v. Reeve, 373 Pa. 513, 95 A.2d 925 (1953) (upholding covenant encompassing the United States). "[W]hen fashioning an injunction to enforce a restrictive covenant, trial courts have broad powers to modify the restrictions imposed on the former employee to include only those restrictions reasonably necessary to protect the employer." All-Pak, Inc. v. Johnston, 694 A.2d 347, 350-51 (1997). Application of law to fact,'. In the present case, it appears clear that the covenant not to compete entered into was intended to encompass the activity being pursued by Defendant at his new employment. The covenant was incident to Defendant's employment relationship with Plaintiff, and has been shown for present purposes, at least to the extent provided for hereafter, reasonably necessary for protection of the employer. It further appears that the harm occasioned to Plaintiff by this breach and the threat of a continuation of the covenant's violation is immediate and irreparable as those terms are understood in this area of the law. A refusal to issue 6 a preliminary injunction would appear to carry more risk of harm than issuance of the injunction. Finally, issuance of a preliminary injunction in the present circumstances would operate to restore the parties to the status as it existed prior to the alleged wrongful conduct. For the foregoing reasons, the following preliminary injunction will be issued: PRELIMINARY INJUNCTION AND NOW, this 11th day of January, 2002, upon consideration of Plaintiff's motion for a preliminary injunction, following a hearing held on December 27, 2001, and for the reasons stated in the accompanying opinion, it is ordered, adjudged and decreed as follows: 1. Pending further order of court, Defendant is enjoined from continuing his present employment with Hostetter Supply Company, Inc., in violation of the covenant not to compete sub jttdice, for a period of one year from the effective date of this preliminary injunction. 2. This preliminary injunction shall become effective upon the posting of a bond or cash in the amount of $55,000.00, in accordance with Pennsylvania Rule of Civil Procedure 1531(b). 3. In the event the requisite bond or cash is not posted or deposited within 20 days of the date of this order, the order shall be deemed automatically dissolved. BY THE COURT, John W. Purcell, Jr., Esq. 1719 North Front Street Harrisburg, PA 17102 Attorney for Plaintiff s/J. Wesley Oler, Jr. J. Wesley Oler, Jr., J. 7 Stephen S. Makowski, Esq. 3110 East Market Street Suite E York, PA 17402-2512 Attorney for Defendant 9 MASON-NORTON COMPANY, INC., Plaintiff IN THE COURT OF COMMON PLEAS OF CUMBERLAND COUNTY, PENNSYLVANIA Vo CIVIL ACTION - EQUITY SCOTT W. THUMMA, Defendant NO. 01-6500 EQUITY TERM IN RE: PLAINTIFF'S MOTION FOR PRELIMINARY INJUNCTION BEFORE OLER, J. PRELIMINARY INJUNCTION AND NOW, this 11th day of January, 2002, upon consideration of Plaintiff's motion for a preliminary injunction, following a hearing held on December 27, 2001, and for the reasons stated in the accompanying opinion, it is ordered, adjudged and decreed as follows: 1. Pending further order of court, Defendant is enjoined from continuing his present employment with Hostetter Supply Company, Inc., in violation of the covenant not to compete sub judice, for a period of one year from the effective date of this preliminary injunction. 2. This preliminary injunction shall become effective upon the posting of a bond or cash in the amount of $55,000.00, in accordance with Pennsylvania Rule of Civil Procedure 1531(b). 3. In the event the requisite bond or cash is not posted or deposited within 20 days of the date of this order, the order shall be deemed automatically dissolved. BY THE COURT, J. Wesley Oler, Jr., J. 11 John W. Purcell, Jr., Esq. 1719 North Front Street Harrisburg, PA 17102 Attorney for Plaintiff Stephen S. Makowski, Esq. 3110 East Market Street Suite E York, PA 17402-2512 Attorney for Defendant